More Than Fresh Consideration Required to Support New Termination Clause

It is now common for employers to present offers of employment that contain termination clauses that remove the employees’ right to reasonable notice of dismissal. These clauses are popular with employers because they significantly reduce the cost of dismissal. A termination clause will be enforced by a court as long as it provides at least the minimum notice and severance provisions required by the Ontario Employment Standards Act 2000.

Inserting a termination clause into an existing employee’s contract is much more difficult. It is well established that this type of substantial change to the employment contract requires new consideration. A court will not view continued employment as consideration except in exceptional circumstances. Therefore, the employer must ensure that it provides the employee with a promotion, bonus or something else of value at the time the employee signs the new employment contract.

Providing new consideration is not, however, sufficient to ensure that a court will enforce a new termination clause. The employer must also be prepared to lead evidence that the employee was aware that he or she was giving up the right to reasonable notice. This requirement was established by the Ontario Court of Appeal in Braiden v. La-Z-Boy Canada Limited 2008 ONCA 464. Gillese J., writing for the Court, set out three requirements that, at a minimum, the employer must prove before a court will enforce a new termination clause. At paragraph 61 Gillese J. wrote:

Nothing in these comments is intended to suggest that it would not have been possible for La-Z-Boy to have entered into a fresh agreement with Mr. Braiden with a notice provision of the sort in question. However, at a minimum, in order to discharge the burden of establishing such a new agreement, La-Z-Boy would have to point to evidence that it clearly communicated the changes in the agreement that governed its relationship with Mr. Braiden, Mr. Braiden appreciated that he was giving up legal rights and consideration flowed for his forfeiture of those rights. [emphasis added]

It will be a challenge for many employers to lead evidence that meets this burden. In practice, many employers do not expressly bring the new termination provision to the attention of their employees, let alone explain its implications prior to having their employees execute new employment contracts. Although certain employees occupying human resource or senior management positions will have knowledge of their right to reasonable notice of dismissal due to the very nature of their positions, most employees will not. Therefore, to meet the requirements set out in La-Z-Boy in most instances an employer will be required to demonstrate that it either: (i) properly informed the employee of he or she had a right to reasonable notice of dismissal that was to be forfeited; or (ii) that the employee had legal advice prior to accepting the new terms.

The test set out in La-Z-Boy appears to have flown very much under the radar. To date, there does not appear to be a decision that has applied the test, despite the fact that La-Z-Boy was released almost seven years ago.

The requirement that an employer must prove that its employee was aware that he or she was forfeiting a legal right if it seeks to enforce a new termination clause is obiter. However, since this obiter comes from our province’s highest court it will be very influential in the lower courts. This presents an opportunity for dismissed employees to take the position that termination clauses inserted into their employment contracts prior to dismissal are unenforceable. Employers’ counsel should ensure that their clients are aware that although consideration is a must, it is not necessarily enough to rebut their employees’ right to reasonable notice of dismissal.