Termination Provisions In Employment Contracts

Sep 23rd, 2014

By Barry Landy

Uncertainty is the bane of business. And one of those business life experiences that causes its share of uncertainty and anxiety, usually mixed in a toxic brew, relates to dismissing employees who for whatever reason, no longer fit into the corporate plan or culture.

So it comes as no surprise that good labour law lawyers (now referred to by the more politically correct term of “employment law” lawyers) seek to reduce at least the financial uncertainty surrounding employee dismissal by stipulating in advance what a dismissed employee may expect to receive at the termination of the employment contract.

For example, a typical clause in an employment contract might provide that should the employer decide that the employee’s services are no longer required, in the absence of just cause, that the parties mutually agree that the employee shall accept 3 weeks base pay per year of service, to a maximum of 9 months, in full and final satisfaction of all claims that an employee might have arising out of or related to his (or her) dismissal.

The issue then becomes: how legally effective is that drafting? If a senior employee with limited prospects for finding new employment has been working at a high-level position with one employer for 20 years, and can otherwise establish that say 12 months or more notice of dismissal would have been appropriate, will the Quebec courts uphold the validity of the above clause and limit the employee’s claim to the contractually stipulated amount?

For the moment the answer to that question in Quebec appears to be no, in the sense that the dismissed employee will be able to sue the employer for an amount exceeding the contractually stipulated amount.

This is the case because article 2091 of the Quebec Civil Code provides that “Either party to a contract for an indeterminate term may terminate it by giving notice of termination to the other party. The notice of termination shall be given in reasonable time, taking into account, in particular, the nature of the employment, the specific circumstances in which it is carried on and the duration of the period of work.”

Article 2092 of the Quebec Civil Code provides that: “ The employee may not renounce his right to obtain an indemnity for any injury he suffers where insufficient notice of termination is given or where the manner of resiliation is abusive.”

In a recent decision, Justice Gérard Dugré of the Quebec Superior Court explained how these articles of the Quebec Civil Code applied. The case in question is Ellingsen v. PWC Management Services 2014 QCCS 4199.

Firstly, taught the Judge, both of these provisions are matters of public order, meaning that they are absolute and cannot be modified by contract.

Secondly, article 2091 applies from the moment the employment contract is resiliated, whereupon the obligation arises for the employer to give a reasonable notice of termination. Article 2092 then implicitly permits the practice whereby an employer can offer an employee a monetary indemnity equivalent to the amount that the employee would earn, including salary and benefits, during the notice period, as opposed to having the employee having to work for x months, at the end of which time the dismissal becomes effective.

In short, reasoned the Judge, when the employer pays the employee an amount in lieu of reasonable notice, the payment satisfies the employer’s obligation under article 2091.

On the other hand, article 2092 is fundamentally different from article 2091 in the sense that from a timing point of view, article 2091 is prospective and requires the employer to make an analysis of what notice ought reasonably be given to the employee at the time of dismissal, whereas article 2092 is retrospective and allows the court to examine the issue of the reasonableness of the notice period (or corresponding monetary indemnity) after the fact, that is taking into account what actually happened to the employee in his or her post-employment situation. For example, was the notice period in fact sufficient to permit the employee to actually find alternative employment.

Having set forth that conceptual analysis, Justice Dugré then turned to the contractual clause referenced above and found that the portion of the clause stating that the employee would be entitled to a fixed or determinable amount was perfectly legal, but it was illegal to stipulate that the amount was payable in full and final satisfaction of all claims that an employee might have arising out of or related to his (or her) dismissal, because this was contrary to public order.

In examining the above-noted clause, Justice Dugré came to the conclusion that where an employer agrees to pay an employee a contractually stipulated amount as a termination indemnity, (depending upon the drafting), the contractual amount becomes payable upon the termination of the employment contract and is not reduced or reducible even if the employee finds alternative employment the very next week. Another way of saying this is that the employee has no obligation to try to mitigate his damages in connection with contractually stipulated termination indemnities (which is not the case where no such indemnities have been stipulated in advance).

Finally, a Court confronted with a clause similar to the one described above must not only apply the clause, but then it must examine as a further issue the question of the sufficiency of the contractual indemnity in light of all of the prevailing circumstances.

You can see where this is going: in the case of termination of the employment agreement for an indeterminate term the employer has 4 basic options:

  1. provide the employee with “reasonable notice” of dismissal, which in principle is “working notice”;
  2. pay the employee the contractually stipulated termination indemnity;
  3. grant the employee a more generous notice of termination than the notice period contractually stipulated; or
  4. pay the employee a more generous amount than the amount contractually stipulated where that more generous amount corresponds to the amount the  employee could expect to receive during the reasonable notice period.

In considering what amount is reasonable (issues of a contractually stipulated amount being set aside), the Court will essentially look to place the employee in the same situation that the employee would have been in had the correct notice period been respected, but will also take into account mitigating factors, such as the employee actually having found new employment during the notice period.

So the exercise goes like this:

  1. determine the situation the employee would have been in, had he or she received reasonable notice of termination;
  2. determine the employee’s actual situation at the date the judgment is pronounced, for example, take into account mitigating factors such as the employee having received employment income from a new job during the notice period;
  3. the difference between (i) and (ii) is the correct measure of damages.

The final piece of the indemnity puzzle is the contractual indemnity. The employee cannot “double-dip”. The dismissed employee’s “correct” damages (corresponding to the amount the employee would have received during the “correct” reasonable notice period, less any mitigating damages), is not payable where the contractually stipulated amount exceeds the reasonable notice amount.

In conclusion, it seems that stipulating clauses that purport to define or absolutely limit employee termination indemnities is not legally possible in Quebec. Does it follow that employers should stop the practice of inserting such clauses in employment contracts?

Despite the fact that such clauses may not produce all of their intended effects, I would say no, that there is more for an employer to gain than to lose by setting forth specific termination rules, even if an employee might obtain a better result by suing before the courts. I suggest that the final chapter regarding this issue has yet to be written. The only “downside” appears to arise out of what is essentially a contract drafting issue, namely can the contractually stipulated termination indemnity be drafted to reduce the amounts payable to the employee who fails to mitigate damages and the answer to this question is clearly yes.

Barry Landy is a senior litigation lawyer at Spiegel Sohmer who focuses his practice on commercial litigation and is also experienced in the area of media law.