Courts have been scrupulous in holding employers to a high standard with respect to employment contracts, leading to several rulings in which a termination provision was declared void and unenforceable because it might, in certain circumstances, conflict with employment standards legislation. Courts have established a rule that even a valid part of a termination provision will be declared void if there is a defect elsewhere in the provision.
In welcome news for employers, the Ontario Superior Court of Justice recently limited the scope of this strict approach in Taylor v. Salytics Inc.[1] In that decision, the court confirmed that while a temporary lay-off can constitute constructive dismissal triggering notice and other entitlements, this will not be the case if the lay-off is permitted under the employment agreement. This is because, in Ontario, an employment agreement must include an express or implied right to temporarily lay off an employee, failing which a lay-off may amount to a without cause termination.[2] The court’s ruling saved this employer liability for six months’ pay in lieu of reasonable notice or $58,650.
What happened?
Barry Taylor was employed with Salytics for approximately eleven years when he was temporarily laid off. Six months into the lay-off Salytics recalled Taylor.
Prior to commencing employment with Salytics, Taylor had executed an employment agreement which included a termination provision and a lay-off provision, both under the heading “Termination.” The lay-off provision read: “In the event a temporary lay-off is ever required, it may be implemented in accordance with the requirements of the Employment Standards Act, 2000.” The lay-off provision, standing alone, was valid. However, the termination provision was void.
Taylor filed a lawsuit alleging his temporary lay-off was a constructive dismissal and claiming entitlement to six months’ pay in lieu of reasonable notice. He argued the temporary lay-off provision, even if enforceable as a standalone, was void by virtue of its association with the void termination provision. If Taylor was correct, Salytics had no legal authority to lay him off.
Salytics took the position there was no constructive dismissal for two key reasons: first, a temporary lay-off was contractually permitted; and second, the lay-off provision was not a termination provision – it was separate and distinct from the void termination provision. As such, while the termination provision may have been void, the lay-off provision was enforceable.
Court decides a lay-off provision is not a termination provision
In dismissing Taylor’s claim, the court made two key findings: first, the placement of the lay-off provision under the “Termination” heading did not determine its legal character; the substance of the provision was more important; and second, the termination provision and the lay-off provision were distinct provisions from each other, such that the invalid termination provision did not invalidate the lay-off provision:
The fact that a unilateral lay-off by an employer constitutes constructive dismissal at common law, does not make a lay-off provision in an employment contract a termination provision. A lay-off is a termination when there is no clause in the agreement permitting the employer to lay-off the employee. When there is such a clause, the lay-off is not a constructive dismissal, and therefore not a termination. [3]
Lessons for employers
An employment agreement remains one of the best returns on investment for an employer. Not only is a valid and enforceable termination provision an important tool to limit potential liability, but an enforceable lay-off provision can permit an employer to place an employee on a temporary lay-off under the Employment Standards Act (Ontario), providing greater flexibility to manage a workforce in uncertain times.
Of course, drafting an enforceable employment agreement is not as easy as it may look (or as the internet may suggest). The rash of termination provisions struck down by the courts – even ones prepared by counsel – should make this clear. Retain an experienced employment lawyer to draft an employment contract or update existing contracts. A modest investment today has the potential to save you thousands of dollars tomorrow.
To learn more or for assistance, contact your Sherrard Kuzz LLP lawyer or info@sherrardkuzz.com.
[2] Even when an employer is permitted to temporarily lay off an employee, that lay-off is deemed to be a termination once a certain period passes; and that period varies from province to province. Discuss with your Sherrard Kuzz LLP lawyer before taking steps, particularly if a change impacts a group of employees when potential liability can be considerable.
[3] Supra, note 1 at para 49.
