Pitfalls in Drafting Termination Clauses in Employment Contracts

In this blog post, we review two recent Alberta decisions which emphasize the importance of incorporating clear and unambiguous termination clauses in employment agreements, as well as the consequences for employers when such clauses fall short of this standard.

Generally, courts will not uphold a termination clause in an employment agreement that does not clearly and unambiguously set out an employee’s entitlement to notice or pay in lieu of notice following a termination of employment without just cause. A court may instead award damages based on an employee’s common law reasonable notice entitlement, which can significantly exceed what the parties may have intended in their agreement.

In the decisions discussed below, the Alberta courts reviewed termination clauses in employment agreements that identified a pre-determined notice period, but also gave the employer the option to provide more notice at the employer’s discretion. The courts held that, because the termination clauses did not provide an upper limit on an employee’s notice entitlement, the clauses were ambiguous and unenforceable. The decisions offer important practical insight as to what the clear and unambiguous threshold requires.

Bryant v Parkland School Division, 2022 ABCA 220

In Bryant v Parkland School Division, 2022 ABCA 220 [Bryant], three long-term employees were terminated with 60 days’ notice, purportedly pursuant to their respective employment agreements that were in the standard form used by their former employer. The employees brought an action claiming common law reasonable notice damages. The termination clauses in question stated:

This contract may be terminated by the Employee by giving to the Board thirty (30) days or more prior written notice, and by the Board upon giving the Employee sixty (60) days or more written notice. [Emphasis added]

The employer argued that the phrase “60 days or more” provided the employees with an enforceable floor entitlement and also reserved to the employer the sole entitlement to provide the employees a longer notice period if it wished to. The employer argued that this interpretation was unambiguous. The employees, conversely, argued that the phrase was unenforceable because it was unclear what the ceiling or upper limit was and that such uncertainty or ambiguity must be resolved in their favour.

Court of Queen’s Bench Decision

Upon hearing cross summary judgment applications, the chambers judge found that the phrase, “or more” in the termination clause was unambiguous. The judge determined that the employees were entitled to a base notice of 60 days, but if the employer wished, it could provide greater notice. The chambers judge reasoned that the wording “or more” did not allow the employees to know with certainty how much additional notice they may receive, but it did not render the provision unenforceable.

Court of Appeal

The employees appealed the decision.

In a split decision, a majority of the Alberta Court of Appeal accepted the principle of law that a termination provision in an employment agreement must be clear and unequivocal in order to oust the implied term that provides an employee with reasonable notice at common law. The majority also accepted the principle that, where there is ambiguity in a termination clause, it must be interpreted in a way that is most beneficial for the employee.

The majority determined that the termination clause was ambiguous and overturned the lower court’s decision. The majority reasoned that the termination clause at issue did “not clearly fix the employees’ notice entitlement” and did “not impose an upper limit on the amount of notice an employee is entitled to receive” (para 16). The majority further observed, helpfully, that had the termination clause only provided a fixed notice period of 60 days, the clause would have been unambiguous.

The majority awarded the appellant employees damages based on their common law notice entitlements.

This decision affirms that termination provisions that do not impose an upper limit to employees’ notice entitlements may result in unanticipated liability.

Plotnikoff v Associated Engineering Alberta Ltd., 2023 ABCJ 200

The decision of the Alberta Court of Justice in Plotnikoff v Associated Engineering Alberta Ltd., 2023 ABCJ 200 [Plotnikoff] offers another example of the same principles applied in Bryant.

The plaintiff employee in Plotnikoff was employed by the defendant employer for almost ten years. His employment was terminated by his former employer without cause and he was only provided with his statutory notice of termination entitlement pursuant to the Employment Standards Code, RSA 2000 c. E-9. The employee’s employment agreement included the following termination clause:

Termination Without Cause: The Company may terminate employment without cause upon providing the Employee with notice as may be mandated by the Employment Standards legislation or such additional notice as the Company, in its sole discretion, may provide or, at our option, pay in lieu of such notice. [Emphasis added]

In determining that the clause did not clearly and unambiguously extinguish Mr. Plotnikoff’s entitlement to common law reasonable notice, the Court explained that the clause did “not clearly and unambiguously set or impose an upper limit on Mr. Plotnikoff’s notice entitlement” and did “not state that the Code requirements are the maximum notice to which Mr. Plotnikoff is entitled” (para 13). The Court relied upon and reaffirmed the majority decision in Bryant.

The takeaway from both of these cases is that including an option to unilaterally increase an employee’s notice entitlement may create ambiguity and render a termination clause unenforceable.

Drafting termination clauses requires a high level of clarity. Language that suggests an employee may be entitled to more notice than the amount set out in a termination clause may be found to be ambiguous and unenforceable.

Although Saskatchewan courts have not commented on the enforcement of termination clauses recently, Saskatchewan employers should consider such recent developments as reminders to look carefully at their employment agreements and update them if and as needed.

The labour and employment lawyers at McDougall Gauley LLP stay attuned to developments in this area of the law and have experience drafting and enforcing termination clauses.