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 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