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Mar 21, 2017

The Last Word? Enforcing Termination Clauses and Employment Agreements

By Michael F. Horvat

Is this the last word? After a series of decisions in 2016 and the beginning of 2017 which have fallen on both sides of the debate on the enforceability of termination clauses, the Ontario Court of Appeal has issued its decision in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, which may provide clarity to both employers and employees on whether the termination clause in their employment agreement is enforceable.

In Fred Deeley Imports, the Ontario Court of Appeal struck down as unenforceable a termination clause that had previously been upheld by the motion’s judge.

Ms. Wood had worked for Fred Deeley Imports Ltd. as a sales and event planner for just over eight years, where she had earned approximately $100,000.00, plus benefits. At the time of her hire, Ms. Wood had executed an employment agreement which contained a termination clause that stated (in part) as follows:

“[The Company] is entitled to terminate your employment at any time without cause by providing you with two (2) weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph.”

Ms. Wood also acknowledged in the agreement that the payments provided would be inclusive of any entitlement to notice and severance she may be entitled pursuant to the Employment Standards Act, 2000 (“ESA”).

The motions judge had upheld enforceability of the termination clause notwithstanding that (as had been the basis of successful challenge in other cases) the agreement did not reference a specific requirement to continue benefit coverage or pay statutory severance under the ESA. It was enough that the company had made the requisite premium payments on Ms. Wood’s behalf to continue her benefits during the required statutory notice period and that the total notice payment included statutory severance.

At termination, Ms. Wood received twenty-one (21) weeks’ pay in lieu of notice (and severance) and, although there was no breakdown of how this number was determined, it was nonetheless greater than what would have been required by the ESA. Ultimately, she almost doubled her entitlement to 39 weeks at common law when the termination clause was found to be unenforceable on appeal.

Potentially reconciling prior decisions with differing opinions on the enforceability of such clauses, the Ontario Court of Appeal did a fairly deep dive into analyzing what would constitute an enforceable termination clause limiting notice/severance. Most importantly for employers, by engaging in such an analysis, the Ontario Court of Appeal at least confirmed that such clauses are permitted, provided they meet all the legal requirements (at least what the court currently considers the be the legal minimum).

In Fred Deeley, the Ontario Court of Appeal has given fair warning to employers in Ontario that if they seek to rely on such clauses, it will rest with the employer to bear the burden (and risk) of proving enforceability. The Ontario Court of Appeal concluded that such clauses should be interpreted in a way that “encourages employers to draft agreements to comply with the ESA. If employers can always remedy illegal termination clauses by making payments to employees on termination of employment, then employers will have little incentive to draft legal and enforcement termination clauses at the beginning of their employment relationship.”

First, a termination clause that fails to specifically reference the employer’s obligation to pay statutory severance and continue employment benefits (such as health, disability and life insurance, and pension benefits) as required by the ESA will be voided, even if the employer takes other steps to make such payments and maintain such benefits. Employers should no longer take comfort in general or implied language that it was understood that they would satisfy the requirements of the ESA. In order to have the termination clause enforced, the plain wording of the clause will have to be clear and specific on employer obligations, and what the employer does or does not do after notice of termination is given will not be able to cure an otherwise illegal or unenforceable termination clause.

The Ontario Court of Appeal appears to agree with the line of cases that has regularly found that the enforceability of the terms of employment contract, and whether or not such contract complies with the minimum statutory provisions of the ESA, is determined at the time the contract is signed and not at termination. Again, the court is stating that the plain words of the contract (accepted to be in the drafting control of the employer) are to be given greater importance than the intention of the parties. If the clause could, at any time, be offside the ESA, it will very likely be unenforceable.

The requirements set out in Fred Deeley will also have to be balanced with other court decisions which have found that the employee’s waiver of their common law rights must be equally clear.

So, what does this case mean for employers? First, contractual limitations and restrictions on notice and severance are permitted, but only if employers meet the (current) test of enforceability. Words mean more than what the parties had intended when the contract was signed. An employee’s acquiesce and agreement to a limitation and the employer meeting its ESA obligations, without clear wording that supports both actions, will likely no longer be sufficient.

What should employers do:

  • Constantly review the terms of their employment contracts as laws and juridical interpretation will change and evolve;
  • Consider using clear formulas which provide more than the minimum entitlement;
  • Be clear and use direct and plain language that describe all of the employer’s obligations upon termination and obtain an acknowledgement from the employee that he/she is waiving their common law entitlements upon termination; and
  • Employers who rely on “silence” or “intent” with regard to their ESA obligations, without clear explanation as to what will be paid and what benefits will be continued, do so at their peril.

Therefore, while it may not be the last word, with its decision in Fred Deeley, the court has firmly placed the onus and obligation upon employers who seek to rely on such termination clauses in the future to be prepared to defend them. 

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