What is a termination clause?

A termination clause is a passage of an employment contract that defines an employee’s rights to notice, severance or termination pay in lieu of notice. Sometimes it is called a severance clause in an employment contract. Most termination clauses are drafted in favor of the employer to limit their employees’ rights to severance after they are terminated.

Alternatively, a termination clause can be written in favor of the employee by providing them rights far greater than the common law. For instance,  c-suite executives often execute a standard termination clause entitling them to two years’ notice. Likewise, employees who are induced or poached away from secure employment often negotiate greater severance rights in a termination clause made in their favor so as to limit their risk in joining the new employer that solicited them.

Nevertheless, as discussed above, termination clauses are typically drafted in favor of the employer.

Termination clauses have become increasingly common, and most employment contracts include them now.

  • Why? They severely limit what an employer must pay an employee upon termination.
  • How? the termination clause provides a formula for calculating notice that is less than the common law, and  equal to or slightly more than the minimum legal requirements.
  • Are they Legal? It depends if it was written recently, and by a good employment lawyer (see discussion below)! If it was copied from an old employment contract passed along by the employer for years, then probably no. Courts will not enforce a termination clause which breaches (or could breach) any employment law, and the law is always changing.

An example of a termination clause is as follows:

…unless an employee is terminated for willful misconduct, disobedience or willful neglect, an employee’s employment may be terminated at the sole discretion of the Employer upon providing the employee with one (1) weeks’ notice or base salary in lieu thereof for every year of service, up to a maximum of eight (8) …. [call us for the rest]

When a termination clause is included in an employment contract, it is usually crafted in favor of the employer at the expense of the employee. This is because common law rights to notice can be very lucrative for the employee at the expense of the employer. For instance, a senior employee without a termination clause in her contract could be entitled to 24 months’ notice, whereas the same employee with a termination clause could only be entitled to 2 months’ notice.

Most termination clauses limit an employee’s rights to notice to the very minimums required by law – one week of notice for every year of service, up to a maximum of eight, as per Ontario’s Employment Standards Act.

What if the employment contract doesn’t have a termination clause?

Not all employment contracts have a termination clause. An employment contract without a termination clause gives the employee “common law” rights to notice.

Unlike most termination clauses, there is no formula for common law rights to notice. Calculating common law notice is an art, not a science, but it is generally accepted that the average short term employee is owed a couple of months’ notice, 24 months for a long term employee, and somewhere in the middle for the rest. Read the guide to wrongful dismissal and notice for more.

How to get out of a termination clause in an employment contract:

In a wrongful dismissal lawsuit, employees can strike out the termination clause from their employment contract if they can prove that the termination clause is unenforceable. If they are successful in striking out the termination clause, then common law notice applies.

A termination clause is unenforceable if it provides less notice than the government minimum standards. For example, in Ontario, the Employment Standards Act requires employers to give 1 weeks’ notice for every year of service. Thus, if the termination clause provides anything less than 1 week of notice per year of service, it is unenforceable.

A termination clause is unenforceable if it COULD provide less notice than the government minimum standards. For example, in Ontario, the Employment Standards Act requires employers to give 1 weeks’ notice for every year of service up to a maximum of 8 weeks. Thus, if the termination clause provides for 1 weeks’ notice up to a maximum of only 4 weeks, it is unenforceable.

A termination clause is unenforceable if it implicitly or explicitly fails to provide the same benefits during the notice period that the employee would be entitled to had they still been working. For example, if the termination clause states that the employee is entitled to “salary continuation for x weeks” but makes no mention of benefits, the termination clause may be unenforceable.

A termination clause is unenforceable if it implicitly or explicitly fails to provide for notice AND statutory severance, which are two separate concepts in Ontario. For example, if the termination clause states that the employee is entitled to “pay in lieu of salary for x weeks only” but makes no mention of severance, the termination clause may be unenforceable.

My friend, Barry Fisher, the noted mediator for employment law in Toronto, alerted me recently to the fact that the language in a termination clause concerning “with cause terminations”, if written poorly can defeat the entire termination clause, including the language about without-cause terminations. This is especially true if the offending “with cause” portion is tied into the same paragraph as the valid “without-cause” portion.

A termination clause is unenforceable if it is unclear, confusing, vague or ambiguous. For example, if the termination clause only says something like “employee is entitled to minimum notice” and nothing more, then it could be unenforceable. As a second example, if there is anything in the termination clause that remotely conflicts with itself whether by grammatical mistake or because it was sloppily copied from one contract to another, then the termination clause could be unenforceable.

At the same time, a termination clause could of no effect if it failed to actually limit the employee to some amount of common law reasonable notice. For example, if the termination clause merely says that “the employer will follow employment standards”, and nothing more, that is not enough to oust the common law right to reasonable notice. All the termination clause is essentially saying is that the employer will at least pay ESA minimums, which is too vague. Rather, a good termination clause for the employer should have said some keyword like “only” or “these rights are inclusive of your common law rights”.

A termination clause is unenforceable if it was not validly entered into in the first place. The following examples could be unenforceable termination clauses in this regard:

  • If the termination clause was not contained in the contract but rather in an employee handbook
  • If the termination clause or even the contract was signed by the employee after they started working
  • If the employee’s position changed significantly after signing the termination clause

A termination clause is unenforceable if it breaches any other employment standard or rule of contract:

  • If it is unconscionable (i.e. unreasonably harsh or excessive)
  • If it breaches public policy
  • If the contract was signed under duress (i.e. threatened to be fired if not signed)
  • If the contract contains elements of fraud

Dutton Employment Law is a Toronto employment contract law group. Call us today to speak to an employment lawyer for a free consultation for advice regarding termination clauses.