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Garreton v Complete Innovation: Determination of Enforceability of an Employment Agreement
They say time changes everything. Well, according to Garreton v Complete Innovation (2016 ONSC 1178) time ought not to change the enforceability of a termination provision – a termination provision should be enforceable at the time of contract, and at a time in the future.
The Current State of the Law
Let’s start first with the case of Wright v. The Young and Rubicam Group of Companies (Wunderman), (2011 ONSC 4720). In Wright, the Plaintiff, John Wright was hired by the employer Rubicam as a Vice President and Director of Integrated Marketing. He was terminated without cause from his employ after working for just over five years.
Although Mr. Wright had been employed with Rubicam for only just over five years, his Employment Agreement (EA) had entitled him to receive payments that exceeded the minimums required under the Ontario Employment Standards Act (ESA). He received thirteen weeks of base salary, car and parking allowances, and matching RRSP contributions.
However, an important clause in the termination provision in the Plaintiff’s EA read:
This payment will be inclusive of all notice statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.
Despite having received the payments as outlined above, Mr. Wright sued his employer for wrongful termination. Mr. Wright argued that the termination provision in his Employment Agreement had failed to provide for benefits but instead, had specifically excluded them contrary to the ESA.
The Court agreed with Mr. Wright.
Justice Low wrote: “The fact that the defendant continued benefits for the statutory notice period under the [ESA] does not change the meaning of the language used in the agreement stipulating that the payments under the termination provisions are to be inclusive of “all … entitlements to compensation”. The agreement provides for payment of base salary only. Payment of base salary, if treated as inclusive of all entitlements to compensation, means that there will be no other compensation flowing to the employee – in short, no benefits.
The Judge held, “. . . the clause excludes benefits and is therefore in violation of s. 5(1) and s. 61(1)(b) of the [ESA].”
In simpler terms, even though the ESA hadn’t yet been violated, the fact that it could have run afoul with legislation in the future was sufficient to make the EA unenforceable.
Justice Low didn’t think it ought to be that difficult to create a law-abiding termination clause right from the start.
Although the termination provision in the employment agreement did not technically violate the provisions of the ESA at the time of termination, the fact that it had the potential to do so at other times, made the agreement unenforceable.
Mr. Wright was thus awarded 12 months’ pay in lieu of notice for a total of $213,000.00.
On the Other Hand…
The recent case of Goldsmith v Sears Canada Inc. (2015 ONSC 3214) also involved the issue the enforceability of an employment contract for a potential future breach.
Mr. Steven Goldsmith was employed by Sears Canada for approximately fourteen (14) months before he was terminated from employment. Upon termination, Mr. Goldsmith sued Sears. One of the claims he made was that his Employment Agreement (EA) was unenforceable – even though he was not eligible for them – the fact that the EA could have been violated, (had Mr. Goldsmith worked for longer), made the EA unenforceable.
Para. 23 succinctly states the matter:
Mr. Goldsmith argues that because certain sections of the EA could potentially result in violations of the Act, in certain hypothetical situations (which are not factually applicable in this case), the fact that such potential violations could possibly occur, is enough to make those provisions of the EA void ab initio. (emphasis own).
The judge, Justice Pollak, disagreed with Mr. Goldsmith. The Justice rejected the arguments made in Wright. Instead, the Justice adopted the reasoning in Ford v Keegan (2014 ONSC 4989), citing the paragraphs with respect to notice and notice provisions: “. . . An employer who prescribes a notice period in a contract of employment must conform to provincial employment standards legislation for the particular employee, in the particular circumstances . . .” In other words, in the case of Mr. Goldsmith, it was not necessary to travel to the future to decide on an EA’s validity.
Justice Pollack did not feel as though a potential violation of the ESA was sufficient to make an EA unenforceable.
We have two differing cases: What happens now?
The Case At Bar
The Plaintiff was Marcela Garreton. Her Employer was Complete Innovations Inc. Ms. Garreton was terminated by her Employer after she got into an altercation with another employee over a bagel. Complete Innovations Provided Ms. Garreton with a 2-day suspension. After Ms. Garreton returned to work from her 2-day suspension, she was terminated. Her Employer (Complete Innovations) cited two previous disciplinary actions and the bagel fiasco [termed the “bagel incident”] as reasons for her termination. Ms. Garreton sued her employer. The Trial Judge found in favour of Ms. Garreton. The Employer appealed to the Divisional Court.
What Did the Divisional Court Consider?:
Amongst other this, the Divisional Court examined Complete Innovations’ Employment Agreement with Ms. Garreton. The termination provision came under scrutiny.
The Termination Provision:
Otherwise Complete Innovations Inc. may at any time terminate this agreement by providing the Employee with (1) one week notice if their duration of continuous employment with the Company is more than 3 months but less than 1 year. (2) weeks prior written notice of intention to terminate if the Employee duration of continuous employment with the Company is more than 1 year but less than (3) years. If the duration of continuous employment with the Company is more than 3 years each additional year will entitle the Employee to (1) one additional week of notice to a maximum of 8 weeks. … Complete Innovations Inc. shall maintain on your behalf your employee benefits for a period of not less than the period required by applicable statute.
The Divisional Court:
The Court found the termination provision to be void and unenforceable, not because it violated the proper notice period under the Act, but because it violated sections 64 and 65 of the Act in terms of its severance provisions. Even though, in the case of Ms. Garreton, the severance provisions didn’t even apply (yet).
Under ss. 64 and 65 of the Act, an employee with five years at Complete Innovations, should have been entitled to a further week for each year of employment for severance pay over and above termination pay; the termination provision, which limited pay in lieu of notice to 8 weeks maximum, was less than want an employee would have been entitled to under the Act. It was therefore found void and unenforceable.
The judge stated: “If the termination provision is not onside with notice provisions and severance provisions (if applicable) of the Act at the outset, then it is void and unenforceable. Potential violation in the future is sufficient“
Given that the EA was found unenforceable, Ms. Garreton, who had worked for 2.3 years, got a 5 month notice period – a significant amount above her ESA minimums.
With such a differing reasons in rulings with somewhat similar circumstances, it is important to have a professional assess the facts and apply the law. Based on the cases we discussed, the enforceability of a clause can lean on one word within the termination clause.
Employers: You need to draft your employment contract well. It is important to be properly informed and to seek legal advice before handing off a contract to an employee. Employees: You should ensure your EA confirms with the law – ask a trusted lawyer to review your EA before signing.
Whether you have been fired, or are contemplating letting an employee go, it would be in your best interest (and certainly less costly) to seek professional legal advice from an employment lawyer before making any decisions.