Termination clauses are one of the most important, and often overlooked, parts of an employment contract. A well-drafted clause can provide clarity, reduce risk, and significantly limit an employer’s liability. A poorly drafted one can do the opposite.
Here are four key things business owners need to know.
1. Without a termination clause, the law fills in the blanks
Termination clauses establish the rules for ending the employment relationship.
If an employment agreement does not include a termination clause, the law generally presumes the employee is entitled to common law notice. That can result in lengthy and costly obligations for the employer, often far beyond the minimum requirements under employment standards legislation. In some circumstances, this can mean up to 26 months of notice based on recent case law.
In short, if you do not set out the termination terms in the contract, the courts likely will.
2. Termination clauses create clarity and certainty
Termination provisions serve several critical purposes, including providing clarity on the conditions under which the employment relationship may be ended, protecting the rights of both parties, and helping ensure compliance with statutory requirements.
An explicit termination right is important because relying solely on common law principles can be limiting and uncertain. A properly drafted termination clause allows the parties to end the agreement under agreed-upon terms, even in situations that do not meet the threshold for common law termination.
3. A well-drafted clause can significantly reduce liability
Termination clauses are not just legal boilerplate. They are a key risk management tool.
A well-drafted termination clause can significantly limit an employer’s liability by clearly defining what an employee will receive if the employment relationship ends. This can help avoid unexpected severance obligations and provide greater predictability for workforce planning and business decisions.
For many employers, the difference between an enforceable termination clause and no clause at all can mean the difference between manageable termination costs and a much larger financial obligation.
4. Compliance with employment standards legislation is critical
There is one important catch: a termination clause must comply with applicable employment standards legislation.
To be enforceable, termination provisions must provide notice or entitlements that are at least equal to the minimum statutory requirements. If a clause attempts to provide less than the statutory minimums, it can be struck entirely.
When that happens, employers can find themselves exposed to common law notice obligations, precisely the outcome the clause was intended to avoid.
The takeaway for business owners is simple: a termination clause can be a powerful tool for managing risk, but only if it is carefully drafted and legally compliant.
Not sure whether your employment contracts or termination clauses are up to date and enforceable? Contact a member of SVR’s Employment Law team for a review. A proactive review today can help avoid costly disputes tomorrow.
