Ask any business owner who has been sued for wrongful dismissal, what is the one thing they would do differently the next time around? Aside from making sure to hire a good lawyer, most will say to get workers to sign employer-friendly hiring contracts that limit the amount of severance payable, instead of leaving it open for a judge to decide. Why? Because the severance that a court will award to an ex-employee will almost always vastly outweigh whatever amount may be written into a hiring contract.
For this reason, most hiring contracts being given to Canadian workers do little to help them and are designed to strip away rights they would otherwise have, particularly as it relates to severance.
But I have good news for workers. These contracts may not be the magic bullet employers were hoping to achieve. Several recent court cases, when taken together, have practically rendered many severance-limiting clauses invalid.
The starting point is a 2017 decision from the Ontario Court of Appeal stating that employment contracts must be interpreted differently from other commercial contracts, owing to the vulnerability of workers and their relative lack of bargaining power when creating these contracts and their employment in general. As a result, the Court confirmed that a severance clause must always comply with the minimum protections of employment standards legislation and that if a clause could possibly provide an employee with less than a statutory right at any point in time, it must always be struck down.
In a 2020 decision, also from the Ontario Court of Appeal, the Court determined that if there is any potential inconsistency between a contract and basic severance laws within provincial or federal employment legislation, then the entire section of the contract dealing with severance must be treated as void. This is so even if the potential defect is not directly related to severance, which surprised many employers who had assumed otherwise.
The result in these situations is that, instead of what’s written in the contract, employees would become capable of claiming the far more generous severance handed out by the courts. Notably, the reasoning in these decisions would apply in every Canadian province or jurisdiction.
Since the two cases referred to above, employers have gone back to the drawing board and have attempted to craft their contractual termination clauses more carefully with these concerns in mind. However, another more recent decision is sending shockwaves through the workplace legal community and may just call all hiring contracts into question. In a case that came out a few weeks ago, an Ontario judge struck down a contract that purported to provide the employee with minimal severance because the contract stated that the employee could be terminated in the employer’s “sole discretion” and “at any time.” The court found that these terms could be in conflict with employment legislation that prohibits employers from terminating employees in certain circumstances, such as when they are returning from maternity or bereavement leave.
A large portion of employment contracts that I come across have some reference to an employer’s supposed right to terminate an employee for any reason upon providing some amount of severance. Few companies (or their lawyers) who draft hiring contracts contemplated that such language could ever be offside, as they assumed that compliance with statutory rights was implied. But not so according to this recent decision.
Now, armed with this precedent, and the doubt that it creates, dismissed employees and their lawyers will be sure to challenge any termination clause that doesn’t provide the amount of severance that a court could award.
In light of the uncertainty that will follow, I predict that employers across Canada will scramble to revise their contracts with employees, including asking many workers who are already employed to sign revamped versions of their prior written agreements.
Why would any worker agree to sign such a contract? The problem is that unless they are a senior executive with bargaining power, most workers need the job and will sign whatever documentation is put in front of them, often with little hesitation or resistance. For this reason, courts require that employers provide employees with “consideration,” which means something of value, in exchange for signing a new or revised contract that is taking something away. That consideration can generally be anything of value including a promotion, annual salary increases or a discretionary bonus. I have even seen some companies offer employees as little as a few hundred dollars in exchange for revising their contracts.
When weighing what workers stand to lose in terms of the value of any severance if they are later dismissed, a small signing bonus or salary increase is hardly a fair deal. Therefore, if you are presented with a new contract to sign and offered something to do so, make sure to first consider exactly what it is that you are giving up in return. A good employment lawyer should easily be able to spot if your prior contract has a hole in it and consequently the amount of severance you would receive if fired. Then compare that alongside whatever you are being offered for signing a revised contract and you can quickly determine whether the bargain is fair.
Daniel A. Lublin is a partner at Whitten & Lublin, representing clients in workplace legal disputes. He can be reached at Dan@canadaemploymentlawyer.com.