Law Times

Law Times • may 16, 2016 Page 7 www.lawtimesnews.com Enforceability of termination clauses W ritten employment contracts are relationship management tools. Their goal is to provide certainty of the terms of employment. If an employment contract fails to conform to the provisions of the Employment Standards Act, 2000, it will be invalidated. A recent case in point is Garreton v. Complete Innovations Inc., 2016 ONSC 1178, where the Divisional Court confirmed that a termination provision's "potential" violation of the ESA in the future is sufficient to void it. Notably, it clarified that the termination provision's conformity to the ESA is to be assessed as of the time the employment contract was executed and not at the time of the employee's dismissal. In Garreton, 43-year-old Marcela Garreton worked as a trainer for Com- plete Innovations Inc. On June 7, 2012, she purchased bagels for an internal training session she was to conduct. An- other employee, who was not part of the training session, after obtaining permis- sion from her supervisor, sought to take a bagel. Garreton asked her to wait until the attendees had got their food. The employ- ee grabbed a bagel and Garreton grabbed her wrist. The employee then told her to "get the f--- off ", took the bagel, and left. The employee immediately reported the incident to CI's CEO, who, after inter- viewing Garreton, suspended her em- ployment with pay for two days, describ- ing the incident, in a suspension letter, as "retaliating with physical violence." Upon her return, CI terminated Garreton's two- year employment for cause, in part, due to the bagel incident. At trial, CI did not rely on the provisions of Garreton's written employment contract, which permitted it to dismiss her for cause. Instead, it ar- gued she breached s. 2(1)(3) of the Regulations 228/01, which relieves employers from the obligation to provide notice of termination or termina- tion pay to employees guilty of "wilful misconduct, disobedi- ence or wilful neglect of duty that is not trivial and has not been condoned by the em- ployer." The trial judge found CI's suspension of Garreton's employment was a form of discipline in response to the bagel incident. Because an employee can be disciplined only once for the same offence, CI's deci- sion to dismiss Garreton after she served her suspension constituted double jeop- ardy and amounted to wrongful dismissal. Ultimately, the judge found CI had no cause to dismiss Garreton and awarded her five months' salary. On appeal, CI successfully argued that the trial judge erred in assessing Garreton's damages on the basis of the common law principles but without concluding whether the termination provision in her employ- ment contract was enforceable. It further asserted that, even if Garreton's dismissal was without cause, CI is entitled to rely on the termination provision in the employ- ment contract, which limited Garreton's damages to two weeks' notice. In response, Garreton submitted that the termination provision offends the ESA and is, therefore, unenforceable, because it potentially violates s. 64 and 65 of the ESA. These sections set out the require- ments that must be met for an employee to qualify for sever- ance pay, which has an effect of supplementing the termination pay, if: (a) an employee has five or more years employment; and (b) the company has a payroll of $2.5 million. If these conditions are met, an employee, aside from the termination pay, is entitled to receive an additional week of wages for each year of employ- ment, for up to a maximum of 26 weeks. The termination provision limited Gar- reton's pay in lieu of notice to eight weeks maximum and was inclusive of "all sever- ance pay entitlement, notice of termination or termination pay in lieu thereof. . . . " Gar- reton argued that despite the fact she has yet to be entitled to severance pay, the termina- tion provision did not conform to the ESA in that it potentially entitles her to less than the employment standards minimum. The crux of Garetton's argument was a "potential" breach of the severance pro- visions of the ESA. The argument is not novel, but it is vexing. It required Justice Laurence A. Pattillo to reconcile the incon- sistent wrongful dismissal jurisprudence on whether the termination provision must conform to the ESA at the time the employment contract was executed or at the time of the employee's dismissal. Having examined the conf licting ju- risprudence, Justice Pattillo dismissed CI's appeal, stating that "if the termina- tion provision is not onside with notice provisions and severance provisions (if applicable) of the [ESA] at the outset, then it is void and unenforceable. Potential vio- lation in the future is sufficient." Garreton, hopefully, settled the state of the law in Ontario on the important point at issue. Justice Pattillo's apt conclu- sion finds support in the British Colum- bia Court of Appeal's judgment Shore v. Ladner Downs, 1998 CarswellBC 973 (BCCA), which has been cited with ap- proval in obiter in Slepenkova v. Ivanov, 2007 CarswellOnt 5643 aff 'd 2009 ONCA 526 (ONCA) and applied in Wright v. The Young and Rubicam Group of Compa- nies, 2011 CarswellONt 10754 (Ont. S.C.J.). Garreton, Wright, Slepenkova, and Shore demonstrate courts will void a termi- nation provision whenever there is a possi- bility — however remote or academic — that an employment contract provides an em- ployee with fewer entitlements that he or she would receive under the applicable employ- ment standards legislation on dismissal. Employers should ensure termination pay, notice, severance pay and, inter alia benefits provisions in employment con- tracts satisfy, at least, the minimum statu- tory standards at every point in an employ- ment relationship. If such provisions do not conform to the legislative requirements, courts will invariably invalidate them. LT uNikolay Chsherbinin is an employ- ment and immigration lawyer and author of The Law of Inducement in Canadian Employment Law. He can be reached at 416-907-2587 or by visiting nclaw.ca. COMMENT Labour Pains Nikolay Chsherbinin Employees' interests reign BY RHEA KAMIN T here's good news for some employees from the Ontario Court of Appeal. In Howard v. Benson Group Inc., the court ruled that employees under a fixed-term agreement generally do not have an obligation to mitigate their damages on a without-cause termination before the end of the term. Employees are generally entitled to damages for the unexpired portion of the term, and they can take that money and run without having to account for any re-employment income. The appeal court's decision is another example of a court's willingness to bend the rules in favour of em- ployees, recognizing that they are rarely on equal foot- ing with employers when negotiating contracts, partic- ularly in today's tight job market. Howard was employed as a shop manager at Benson Group, under a contract with a five-year term. Benson Group terminated his employment without cause after 23 months. Howard then brought an action seeking damages for breach of contract, claiming the salary and benefits he would have earned over the balance of the five-year term. Benson Group argued that he was only entitled to two weeks' notice in accordance with the Employment Standards Act, as per the early termina- tion clause in the agreement. The motion judge concluded that the early termina- tion clause was ambiguous and therefore unenforceable. However, instead of awarding Howard damages equiva- lent to what he would have earned over the remainder of the five-year term (generally how it works with fixed- term agreements), the judge awarded Howard damages for common law reasonable notice. Howard appealed the decision, raising two issues: 1. Whether he was entitled to damages for reasonable notice or damages equal to what he would have earned over the remainder of the term; and, 2. Whether mitigation applies to an award of dam- ages for the early termination of the contract. On appeal, the Court of Appeal held that an invalid early termination clause does not displace the general rule that an employee terminated before the end of a fixed term is entitled to the balance of what she would have earned to the end of the term. Common law rea- sonable notice does not apply. As for the duty to mitigate, the court found that it generally does not apply to fixed-term agreements. It based its conclusion on Bowes v Goss Power Products Ltd., a 2012 decision of the court in which it concluded that early termination clauses fixing the period of notice or payments in lieu thereof are like liquidated damages clauses or a contractual sum that do not attract mitiga- tion. Damages are fixed as opposed to being "at large" (as is the case with damages for reasonable notice) and apply regardless of actual loss. In these cases, the parties have contracted for certainty. To turn around and re- quire the employee to deduct re-employment income so that damages ref lect actual loss is inconsistent with the intention of the parties and is unfair to the employee. In Bowes, the agreement at issue was not a fixed- term contract and included an early termination clause fixing the amount of damages owed. Notwith- standing these differences, the appeal court found that early termination clauses and fixed-term agreements were sufficiently similar — both contract out of com- mon law reasonable notice and specify damages owed on breach (albeit impliedly in the case of fixed-term agreements) — that the rationale for finding no obli- gation to mitigate was equally applicable to fixed-term agreements. That conclusion is a clear departure from the prin- ciple that an innocent party has an obligation to miti- gate her damages. The law imposes an obligation on a wronged party to take reasonable steps to limit her loss following a breach of contract. In a commercial context, parties are generally always required to mitigate when suffering a loss as a result of another's breach, the principle being that the innocent party can- not simply sit back and do nothing when she has suf- fered damage. There are few exceptions to this rule. The fact that damages are potentially knowable at the date of breach, being the amount the innocent party would have earned had the contract been performed, does not release her from her obligation. There appear to be sound policy reasons behind the Court of Appeal's decision. Owing to the power imbalance between many employers and employees, it makes sense to, on occasion, depart from established principles and treat these contracts differently from commercial contracts. Courts, including the Supreme Court of Canada, have relied on this inherent differ- ence in interpreting employment contracts in a manner inconsistent with its terms but which better ref lects the actual relationship between the parties, for example, in finding that an independent contractor is actually an employee or a dependent contractor, or in finding that an employee under a series of fixed-term agreements is actually employed for an indefinite term. The Court of Appeal is essentially telling employers to reap what they sow. While fixed-term agreements create certainty for the employer, they are often more precarious for the employee. In some cases, these agree- ments free employers from certain obligations under the Employment Standards Act at the expense of the employee. If the employer wants certainty by contract- ing for a fixed term, it'll have to pay the employee over the entire term, unless it includes a clause that mitiga- tion applies. LT uRhea Kamin practices employment law at Teplitsky Colson LLP, acting primarily for employees. u SPEAKER'S CORNER

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