“Saving Clause” to the Rescue? Employers Should Rely on Sound Drafting First

A recent case confirms (briefly put) that there is no substitute for the proper drafting of employment contracts. In Rossman v. Canadian Solar Inc. the Ontario Court of Appeal dealt a significant blow to the utility of “saving clauses” to salvage drafting errors when a termination provision is not compliant with employment standards legislation.

This article will:

  • explain the basis of the Court’s decision that the saving clause did not rectify the employer’s drafting error; and
  • situate Rossman within the courts’ traditional role of protecting employees in the face of unequal bargaining power.

Rossman v. Canadian Solar Inc.

a. The Termination Clause

The plaintiff, Noah Rossman, was hired in May 2010. His employment contract contained the following termination clause:

…. this agreement may be terminated … on giving the Employee written notice [or pay in lieu] for a period which is the greater of: (i) 2 weeks, or (ii) In accordance with the provisions of the Employment Standards Act (Ontario) or other applicable legislation[.] … Benefits shall cease 4 weeks from the written notice.

The Court held the clause was unenforceable for being inconsistent with Ontario’s Employment Standards Act (“ESA”). It stated with finality that benefits will cease after four weeks; yet the ESA mandates that employees who are employed for four years or more are entitled to benefits continuation for longer than four weeks.

Interestingly, Mr. Rossman had been employed for three years and nine months as of termination and so would have been entitled to less than four weeks’ benefits continuance. But that did not assist the employer. A potential conflict with statutory minimums is sufficient to void a termination clause. The Court stated: “[i]t is not open to this court to save the impugned provision of the [Agreement] with the benefit of hindsight. […] Accordingly, it is irrelevant whether the impugned provision accords with the minimum employment standards in certain circumstances” (paras 28, 29).

The Court further noted that the termination clause was ambiguous as it would have left Mr. Rossman uncertain as to what his entitlement to benefits continuance on termination would be – four weeks as stated in the contract or a longer period based on statute.

In the result, Mr. Rossman was entitled to five months’ notice of termination.

b. The Saving Clause

The termination clause also contained a classic saving provision, which provided that “[if] the minimum statutory requirements as at the date of termination provide for any greater right or benefit than that provided in this agreement, such statutory requirements will replace the notice or payments in lieu of notice contemplated under this agreement.”

The employer argued that this saving provision salvaged the intention of abrogating Mr. Rossman’s right to reasonable notice of termination. The Court disagreed, stating: “The Termination Clause is ambiguous, and the ambiguity is not erased by the saving provision” (para 30). The four-week benefits clause showed an intention to contract for a lesser benefit than provided for in the ESA and the saving provision could not reconcile the “direct conflict” between that and the remainder of the clause (para 35). The Court concluded: “In this context, saving provisions in termination clauses cannot save employers who attempt to contract out of the ESA’s minimum standards” (para 40).

Though this ruling could significantly restrict the utility of saving clauses for termination provisions, it does not render such clauses ineffective in all circumstances. The Court distinguished, but did not dispute, the recent Ontario Court of Appeal case of Amberber v. IBM Canada Ltd., where the Court of Appeal was willing to “read up” a termination clause to make it consistent with legislation, giving effect to a contractual saving provision. Unlike Mr. Rossman’s clause, which expressed an intention to contract out of the statutory minimums (para 36),  the termination provision at issue in Amberber was capable of an interpretation in compliance with the Act – there was no explicit inconsistency between that saving clause and the remainder of the termination provision.

The Broader Context: Unequal Bargaining Power

In recent years, courts have been whittling away at the strategies that employers use to get around faulty drafting and secure favourable terms in their employment agreements. Here are a few popular strategies that have come under fire:

  • Notional Severance: This is a technique that involves reading down an unenforceable provision in a contract to make it legal and enforceable. For example, a court might reduce an illegal interest rate in a commercial contract down to an acceptable level. Notional severance involves literally adding new words to the parties’ agreement.  In doing so, courts supplant the parties’ intentions with alternative terms.  In workplace contexts, employers have tried to rely on notional severance to save restrictive covenants that are unreasonably broad. For example, an employer might argue that a clause preventing an employee from competing with the company for 10 years after termination should be read down to restrict competition for a more reasonable two years. That would allow the employer to overreach when drafting the clause, without the associated risk of the clause being entirely unenforceable. Citing the inequality of bargaining power in employment contexts, the Alberta Court of Appeal rejected this practice: “Employers should not be permitted to draft unreasonably broad restrictive covenants with the expectation that, should the matter ever come to trial, the court will simply re-write the clause so as to make it enforceable” (Globex Foreign Exchange Corporation v. Kelcher at paras 48, 49). In Shafron v. KRG Insurance Brokers (Western) Inc., the Supreme Court of Canada effectively ended this practice, holding that “[n]otional severance is not an appropriate mechanism to cure a defective restrictive covenant” (para 2).
  • Blue-Pencil Severance: This technique involves a judge striking out an illegal portion of a contract so that the remainder is enforceable. Unlike the more controversial notational severance, blue-pencil severance does not involve adding new words to the contract. Nevertheless, blue-pencil severance will not be available in many instances where an employer seeks to salvage an overreaching restrictive covenant. In Shafron, the Supreme Court held: “As for blue-pencil severance, it may only be resorted to in rare cases where the part being removed is trivial, and not part of the main purport of the restrictive covenant” (para 2).
  • Step-Down Clauses: These are another favourite among companies who want to have their cake and eat it too. A step-down clause (also known as a waterfall, ladder or Russian doll clause) involves including multiple alternative provisions related to the same subject and then asking the court to enforce the most restrictive one that is compliant with the law. For example, a non-competition agreement might provide that the employee shall not compete with the employer for 10 years after termination; or in the alternative, seven years; or in the further alternative, five years. This practice has been widely discredited in restrictive covenants. In Bonazza v. Forensic Investigations Canada Inc., the Ontario Superior Court addressed a non-competition clause with a descending scope geographic restriction, including alternative terms providing for progressively less restriction on the location within with the worker could compete with the company.  The Court opined that “a descending scope geographic restriction is by its very nature ambiguous, and therefore always unenforceable… In my opinion, Shafron sounds the death knell for descending scope restrictive covenants” (para 6; emphasis in original).

This jurisprudence is consistent with the traditional role courts have often taken to protecting employees in a context of unequal bargaining power. In most circumstances, employees have limited ability to negotiate favourable terms and courts generally acknowledge that employment contracts are different than typical commercial agreements. Indeed, the Ontario Court of Appeal in Rossman made its policy rationale explicit, stating:

Employers must have an incentive to comply with the ESA’s minimum notice requirements. They cannot be permitted to draft provisions that capitalize on the fact [that] many employees are unaware of their legal rights and will often refrain from challenging notice provisions in court[.] [para 41]

Yet this is not to say that companies should never include saving clauses in their employment contracts or use similar techniques to hedge their bets. Sometimes saving clauses can save the day, as indicated in Amberber v. IBM Canada Ltd. However, it is dangerous to rely on them. Employers are better off taking care to ensure that all clauses in their contracts are properly drafted in the first place.

This article appears in the February 25, 2020, issue of Canadian Employment Law Today published by HAB Press Limited, a subsidiary of Key Media. The original article can be accessed here.

Disclaimer: This blog does not provide legal advice and should not be relied on as such advice. The articles here provide general information only. They cannot take the place of good counsel tailored to your situation. Articles are not updated after publication and may become outdated with changes in jurisprudence or legislation.

Matthew Tomm Law provides legal services in Calgary, Alberta, focusing on employment law and civil litigation.

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