Writing a Termination Clause That Holds Up in Canadian Employment Contracts
Ask any Canadian employment lawyer which clause matters most in an employment contract and most will say the termination clause. It decides what you owe an employee when you let them go without cause, and the difference between a clause that works and one that fails can be tens of thousands of dollars. Courts have struck down a remarkable number of these clauses in recent years, often over details the employer never thought about. Here is what small business owners need to understand before they hire.
Two sets of rules: statutory minimums and common law notice
Every province and the federal jurisdiction has employment standards legislation that sets minimum notice of termination, or pay in lieu of notice, based on length of service. Ontario's Employment Standards Act, British Columbia's Employment Standards Act and Alberta's Employment Standards Code all set out these minimums, and some provinces add severance pay for larger employers or longer-serving employees.
Separately, the common law presumes that an employee who is dismissed without cause is entitled to reasonable notice. Courts decide what is reasonable using factors from the Bardal case: the character of the employment, the employee's length of service, their age, and the availability of similar work. Reasonable notice is often far more generous than the statutory minimum, sometimes up to a month or more per year of service for senior or long-serving staff.
A written contract can limit an employee to something less than common law notice, but only if the clause is clear and never provides less than the statutory minimums.
Why so many clauses fail
In Machtinger v. HOJ Industries (1992), the Supreme Court of Canada held that a termination clause that provides less than the employment standards minimum is void, and the employee falls back on common law reasonable notice. Later cases have taken this further. In Waksdale v. Swegon North America (2020), the Ontario Court of Appeal held that if any part of the termination provisions breaches the ESA, including the clause dealing with termination for cause, the whole set of termination provisions can be unenforceable, even if the employee was dismissed without cause.
Common mistakes that have sunk clauses include:
- Offering only base salary during the notice period and leaving out benefits, commissions or other required amounts.
- A for-cause clause that allows dismissal without notice for conduct that does not meet the very high statutory standard for wilful misconduct.
- Language giving the employer the right to terminate at any time for any reason, or at its sole discretion, without tying it to statutory entitlements.
- Capping total pay at a fixed number of weeks that could fall below the statutory minimum as service grows.
- Introducing the contract after the employee has started work without giving anything new in exchange.
Practical drafting rules
No clause is bulletproof, and the law continues to evolve, especially in Ontario. But following these principles greatly improves your odds:
- Always promise at least the minimum notice or pay in lieu, severance where applicable, and continuation of benefits and other entitlements required by the employment standards legislation in your province.
- Use a savings statement making clear that the employee will never receive less than the statutory minimums, while remembering that courts will not use such language to rescue a clause that is otherwise illegal.
- Draft the for-cause provision carefully, or rely on the statute's own wording, so it does not purport to remove entitlements for conduct short of the statutory threshold.
- State the limit on common law notice in plain words. Ambiguity is interpreted in favour of the employee.
- Have the employee sign before their first day, and give them time to review and seek advice.
- Review your templates at least once a year, and whenever a promotion or raise significantly changes the role.
Probation, resignation and other related clauses
Probationary periods do not automatically remove the right to common law notice. If you want a probation period to limit what you owe, the contract must say so clearly and still respect statutory minimums, which in most provinces apply after a short initial period of employment.
It is also worth addressing how much notice the employee must give if they resign, what happens to company property, and how confidentiality and non-solicitation obligations continue after employment ends. Ontario prohibits most non-compete clauses for employees, and courts across Canada will enforce restrictive covenants only if they are reasonable in time, geography and scope.
When to get legal advice
A well-built template is a good starting point for routine hires, and having any written contract is far better than none. But for senior hires, employees with commission or equity compensation, unionised workplaces, or any termination that might be contested, have an employment lawyer in your province review the contract. The cost of a review is small compared to a wrongful dismissal claim.
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Frequently Asked Questions
Can I pay only the statutory minimum when I let an employee go?
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Only if the employee signed a valid, enforceable termination clause that limits them to the statutory minimums. Without one, most employees dismissed without cause are entitled to common law reasonable notice, which is usually much longer.
Does a termination clause need to mention benefits?
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Yes. Employment standards legislation in several provinces requires benefits to continue during the statutory notice period. A clause that offers only salary can be found void for providing less than the minimum.
What if an existing employee never signed a contract?
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You can introduce a new contract, but you generally need to give fresh consideration, such as a raise, bonus or promotion, for the new terms to be binding. Simply requiring a signature to keep the job may not be enough.