OCA ruling on termination pay stark warning to employers

A recent Court of Appeal ruling is a “stark warning” to employers to be vigilant when drafting employment agreements, Toronto civil litigator, Bruce Baron, tells Advocate Daily.

Baron, principal of Gaertner Baron Professional Corporation, says employers frequently only provide the base salary when giving a severance package to terminated employees.

“More often than not, plaintiff employment lawyers must fight to secure lost bonuses, commissions or other remuneration for their clients,” he says. “There has been no shortage of litigation involving the issue of whether an employer can avoid paying a bonus or commission within the context of severance pay.”

He says the appeal court’s ruling is significant because it clarifies that commissions constitute ‘wages’ as defined in s. 1(1) of the Employment Standards Act (ESA), and must be included in the employer’s obligation to pay notice pursuant to the Act.

“And arguably, common law or contractual notice thereafter,” he adds.

The matter before the appeal court involved a dispute as to whether the appellant employee was entitled to termination pay in accordance with a written agreement or common law reasonable notice.

“The agreement contained a termination clause that amounted to contracting out an employment standard mandated by the [ESA] — basing the termination pay solely on base salary and excluding the employee’s commission. However, the agreement also contained a severability clause,” the ruling notes.

“The issue before the application judge and on this appeal is the interpretation and application of the two clauses in light of s. 5 of the ESA, which prohibits employers and employees from waiving or contracting out of any employment standard prescribed by the ESA, except to provide a greater benefit to the employee,” the decision states.

The application judge used the severability clause to remove what she found to be the offending part of the termination clause, however, the appeal court set that aside, finding that the employee is entitled to receive common law pay in lieu of reasonable notice.

Baron, who was not involved in the matter and comments generally, says the appeal court also made a marked finding with regard to severability clauses.

“In this case, a small portion of the termination provision — only one of three paragraphs — offended the ESA,” he says. “However, the contract also included a severability clause, which permitted the employer to ‘sever out’ the offending paragraph without invalidating the balance of the contract.”

The issue before the court, Baron says, was whether to strike all three paragraphs of the termination provisions or just the offending paragraph.

“The distinction is significant because the employer would either be liable to pay a maximum of 8 weeks notice under the ESA or up to 24 months common law notice,” he says.

“Not surprisingly, the Court of Appeal took a more employee-friendly approach and burdened the employer to ensure that all terms of its termination provision comply with the ESA, failing which the entire passage shall be struck, notwithstanding the severability clause,” he says.

Although it may seem heavy-handed, Baron says the court is mindful of the unequal playing field in the workplace, where employers typically benefit from a power imbalance.

“As evidenced, the court continues its efforts to level the playing field in favour of Ontario’s employees,” he says.

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