With the expansion of Employment Practices Liability Policies (“HR Malpractice Insurance”) and employment practices endorsements in CGL policies, employment related disputes are becoming a growing portion of claim handlers’ workloads. The most common dispute that arises is the provision of proper notice of termination or pay in lieu. Generally, employers are entitled to dismiss an employee for any lawful reason, so long as they provide sufficient notice of termination or payment in lieu of notice. When an employer gives insufficient notice or payment in lieu, an employee may bring a claim for “wrongful dismissal”.
All contracts of employment are presumed to contain an unwritten term requiring “reasonable notice” upon termination. What is “reasonable” will depend on several factors including the employee’s age, length of service, character of employment, and availability of suitable employment in the workforce. Some cases have found particularly long-term employees to be entitled to over 120 weeks of notice upon termination of their employment.
During the period of notice, or pay in lieu of notice, employers are obligated to provide all compensation to the employee that they would have received had they been actively working. This can often include bonuses, commissions, or stock options that would accrue during the notice period.
The presumption of “reasonable notice” can be rebutted by a termination clause. The employer and employee can agree on a specific period of notice required upon termination. This is often lower than what the common law would normally grant. However, whatever period of notice is agreed upon, it must comply with the minimum requires of Ontario’s Employment Standards Act, 2000 (“ESA”).
When doing an initial review of a claim, it is important to determine if there is a termination clause in place, and whether it is valid. Where a clause violates the ESA it is considered void for all purposes and unenforceable. Most termination clauses are unenforceable when the employer:
- Attempts to limit payments upon termination and fails to specifically mention entitlement to severance pay, or benefit continuation;
- Creates a formula that could result in entitlements less than the ESA minimums;
- Contains ambiguous language which fails to explicitly exclude entitlement to reasonable notice;
- Fails to provide sufficient consideration when the clause was agreed to.
Determining whether a clause is valid continues to be a difficult exercise. A recent Ontario Court of Appeal decision, Wood v. Fred Deeley Imports, 2017 ONCA 158, found a termination clause to be invalid for failure to mention entitlement to severance pay, despite the employer having paid the required severance pay under the Employment Standards Act 2000. The plaintiff was accordingly entitled to “reasonable notice.” In contrast, in early 2018 the Ontario Court of Appeal released the decision of Nemeth v. Hatch Ltd., 2018 ONCA 7. In Nemeth, the Court found that where a termination clause does not mention specific entitlements, but does not specifically exclude them, the termination clause can be considered valid. Ironically, despite the employer being successful in upholding the provision’s validity, it was unsuccessful in having the clause interpreted as only providing a maximum of 8 weeks of notice as provided under the ESA and was required to pay 19 weeks. In Wood and Nemeth, neither termination clause mentioned entitlement to severance pay. However, in Wood, the clause specifically excluded any other payments that were not explicitly mentioned in the termination clause. In contrast, the clause in Nemeth did not contain this limiting provision and so silence on the issue of severance was not considered fatal.
To further complicate matters, a 2018 decision of Alberta’s Court of appeal, Holm v. AGAT Labs, 2018 ABCA 23, dealt with a clause that said that upon termination the employee would only receive the notice “in accordance with the provincial legislation for the province of employment”. The Alberta Employment Standards Code, just like the Ontario ESA, says that an employer must give “at least” the number of weeks set out in the Act, in this case 1 week. The Court noted that the use of “at least” meant it was also permissible under the Act to pay more than the one week. Based on this ambiguity, the Court preferred the interpretation favourable. The Court quoted the Ontario case of Wood and found the plaintiff was entitled to “reasonable notice.” Notably, the Alberta Code and the Ontario Act use the same language.
While none of these decisions necessarily contradict each other based on the specific clauses in each case, they are a cogent example of why the validity of termination clauses continues to be the primary battleground in employment practice claims. When addressing a claim covered by an Employment Practices Liability Policy or endorsement to a pre-existing CGL policy, it is prudent to take a hard look at whether the policyholder has written employment agreements, whether they contain a termination clause, and whether that termination clause is likely to hold up to a challenge. The answers to those questions may significantly alter the insurer’s level of exposure to protracted litigation and an adverse award against their insured.
