Crossing a “t” and dotting an “I” may save employers severance costs

There is an abundance amount of focus (rightly so) on employers both large and small to have their employee sign employment agreements with termination clauses in an effort to limit an employer’s liability under the common law upon termination. Once the employee signs the employment agreement it is incumbent on the employer to stay on top of and document any changes to the employment relationship that may affect the enforceability of that termination clause by way of promotion, change in position or a break in the employment relationship. A recent case from the Court of Appeal demonstrates the importance of this principle.

In Theberge-Lindsay v. 3395022 Canada Inc. (Kutcher Dentistry Professional Corporation), 2019 ONCA 469, Ms. Theberge-Lindsay began working for Kutcher Dentistry in 1993 as a dental hygienist. The plaintiff/respondent signed a number of successive employment agreements starting in 1999. Each agreement limited her entitlements upon termination to the minimums required by the Employment Standards Act, 2000 (“ESA”). On March 28, 2005, Ms. Theberge-Lindsay tendered her resignation effective July 7, 2005. Before her effective date of resignation, Ms. Theberge-Lindsay rescinded her resignation. Kutcher Dentistry was prepared to welcome her back.

To document this change, the employer required her to sign a new employment agreement dated June 30, 2005. The agreement contained a clause limiting her entitlement upon termination to ESA minimums. She did sign further employment agreements but they all provided the same termination clause, limiting her entitlements upon termination to the ESA. The employer terminated this employee’s employment in December 12, 2012 without cause and provided her one week termination pay.

The trial judge concluded that none of the employment agreements the plaintiff signed were enforceable and awarded her 15 months notice at common law. The Court of Appeal held that the plaintiff’s resignation created a break in the employment relationship and that the ESA only termination clause was enforceable. Thus, the Court of Appeal reduced her entitlement to 7.5 weeks of salary in accordance with the ESA based on her years of service from 2005.

Takeaway

The Kutcher decision illustrates the importance of employers to document changes in the employment relationship to ensure the enforceability of termination clauses and in turn limit the employer’s liability upon termination. Here the change was a legal break in the employment relationship. In other examples it may be a promotion, a change in responsibility, or dealing with an employee on a long term disability leave. We can assist employers in this process by ensuring that the employment agreement contemplates these potential changes at the front end of the relationship or documenting the change properly at the time. Making this effort can save employers significant termination costs down the road.