The Mistake Employees Make That May Cost Them a Year’s Salary

Every day thousands of Canadians make a mistake that will ultimately cost many of them tens, and in some cases, hundreds of thousands of dollars. The mistake is to accept an offer of employment without appreciating that their employers will have the right to terminate their employment for any reason by providing a severance package that is far below what they may otherwise be entitled to.

It can cost an employee well over a year’s salary if the employee has signed an employment contract that has removed the right to reasonable notice of dismissal. To give an example, in Ontario an older, long-service employee who is employed by a small employer might be entitled to a severance package representing up to 24 months compensation and benefits. However, that same employee would only be entitled to 8 weeks’ notice of dismissal if he or she had signed an employment contract that only required the employer to provide the minimum notice required by law. If that employee’s annual compensation was a $75,000 per year the potential financial loss he or she may suffer if dismissed would be approximately $184,000.

Phil White is an employment lawyer practicing in Toronto. He can be reached at pwhite@grosman.com or 416.364.9599

Phil White is a Toronto employment lawyer. He can be reached by email at pwhite@prwlaw.ca or by phone at 416.613.1381 or 1.888.350.9204 (toll-free)

Even someone who has only been employed for a few years can suffer a significant loss if their employment contract contains a termination clause. It would not be unusual for an average employee who is dismissed after being employed for 2 years to be legally entitled to severance package representing 3 to 6 months’ notice. However, that same employee may only be entitled to 2 weeks’ notice of dismissal if they had signed an employment contract containing a termination clause.     

The law presumes that employees have the right to reasonable notice of dismissal. What is “reasonable notice” depends on the employee’s individual circumstances including the employee’s age, length of service, job position and how difficult it may be to find new employment. However, the right to reasonable notice can be legally removed if the employee signs an employment contract that contains a termination clause that provides the employee with a lesser amount in the event that the employee is ever dismissed. Typically, if an employer places a termination clause in an employment contract, the termination clause will only provide the employee with the absolute minimum notice required by law which is set out in the Ontario Employment Standards Act or, for federally regulated employees, the Canada Labour Code

The reason that some employers ask potential employees to sign employment contracts containing termination clauses is obvious. It dramatically reduces the cost incurred by the employer to terminate the employee’s employment. Employers count on the fact that the vast majority of employees are unaware of the significance of the termination clauses and sign the employment contracts without understanding, let alone considering, the significance of the termination clause.  

When reviewing an offer of employment be on the look-out for wording that states that if you are dismissed without cause you will only receive the minimum notice required by the Employment Standards Act, or words to that effect. If the employer is a bank, airline or involved in the transportation industry the termination clause might reference the Canada Labour Code instead of the Employment Standards Act. The red flag that employees should be on the lookout for is any reference to the allowing the employer to dismiss the employee in accordance with either the Employment Standards Act or Canada Labour Code (sometimes the contract may just refer to “employment legislation”).

If you are offered an employment contract containing this type of termination clause, you have the following options:

  • have the employment contract reviewed by an employment lawyer to determine if the termination clause is legally enforceable. A significant percentage (perhaps 30%) of these clauses have not been properly written and, as a result, will not be enforced by a court. If you learn that the termination clause will not be enforced, you may decide to accept the offer of employment containing the termination clause confident knowing that you will still be entitled to reasonable notice of dismissal;
  • attempt to negotiate the removal of the termination clause.  Negotiating the removal of the termination clause is no different than attempting to negotiate a higher starting salary;
  • if the employer is unwilling to remove the termination clause, you may try to change the terms of the termination clause to provide for a longer notice period if dismissed; and
  • if the termination clause is enforceable and the employer will not agree to its removal consider refusing the job offer. Many employers offer employment without this type of harsh termination provisions.
  • If you accept the offer with the termination clause, do not forget it.  Try to negotiate the removal of the termination at a later date after you have proven your worth to the employer. If this is not possible, consider whether your employment with your employer is going to be long term. The existence of the termination clause may be a reason to look for work somewhere else at some date in the future.

Whatever decision you ultimately make, understand exactly what you have signed up for. Do not be the older, long-service employee who believes they are entitled to a generous severance package only to learn that the employment contract they signed years earlier only requires their employer to provide a fraction of the severance payment they would have been entitled to receive if they had not agreed to give up their right to reasonable notice. Ever case is different but the potential loss of a year or more compensation is not an exaggeration.  Do not let it happen to you.