Employment Contract Law Case Study

Mainstreaming Employment Contract Law: The Common Law Case for Reasonable Notice of Termination

86 PagesPosted: 24 Mar 2013Last revised: 22 Nov 2014

Date Written: March 22, 2013

Abstract

This Article simultaneously exposes a fundamental error in employment termination doctrine and a paradox in contract law jurisprudence. Contemporary employment law has developed under the assumption that at-will parties may terminate their relationship both without reason and without notice. This Article argues that the second half of this formulation – the idea that parties reserve the procedural right to terminate without notice – is neither historically supported nor legally correct. Employment at will, as originally expressed, was a mere duration presumption reflecting America’s rejection of the predominant British rule favoring one-year employment terms. While subsequent caselaw expanded the presumption in various ways, a reinterpretation that requires advance notice of termination remains compatible with the way in which most contemporary courts articulate the rule.

In fact, an examination of general contract law reveals that in a variety of non-employment contexts courts impose on parties to an indefinite relationship the duty to provide reasonable notice while still safeguarding their right to terminate at will. Such an obligation serves not only as a gapfiller in the face of contractual silence, but as a good faith limitation on parties’ exercise of substantive discretion. Absent such a notice requirement, employment is an illusory relationship, one that lacks the modicum of consideration necessary to create a binding contract. While courts have sought to circumvent this problem by theorizing employment as a unilateral contract, that formulation is ill-suited to the reality that both sides generally aspire to an ongoing, dynamic relationship.

Instead, this Article recasts employment as a bilateral contract terminable at will by either party upon reasonable notice. Establishing a reasonable notice obligation will grant terminated workers much needed transition time in which to seek new employment and develop new skills. At the same time, adopting this rule paves the way for a more unified body of contract law. The case for deviations from general contract principles is strongest where context-specific rules fulfill the reasonable expectations of the weaker party. Employment-specific contract rules, as they currently stand, do precisely the opposite. While ordinary contract law cannot adequately protect workers’ interests in all circumstances, this Article demonstrates that in at least some instances mainstream doctrine, properly understood and creatively applied, can produce results that are both good for workers and in harmony with existing law.

Suggested Citation:Suggested Citation

Arnow-Richman, Rachel S., Mainstreaming Employment Contract Law: The Common Law Case for Reasonable Notice of Termination (March 22, 2013). Florida Law Review, Vol. 66, 1513 (2014); U Denver Legal Studies Research Paper No. 13-17. Available at SSRN: https://ssrn.com/abstract=2238220 or http://dx.doi.org/10.2139/ssrn.2238220

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By Doug MacLeod, October 11, 2017 9:08 am

A well-drafted employment contract is the best employment law investment an employer can make. It protects an employer from significant liability and will usually save thousands of dollars in termination costs.

An employment contract should be reviewed periodically because judges are refusing to enforce termination clauses if they are not drafted properly.

In a recent case, Covenoho v. Pendylum Ltd.,2017 ONCA 284, Ontario’s highest court concluded a termination clause was not legally enforceable because it might breach the Employment Standards Act (“ESA”) in the future.

The Facts

Joss Covenoho signed a one year fixed-term contract with Pendylum Inc. The employer terminated her agreement without advance notice when she had been employed for less that 3 months. The termination clause stated in part that the contract could be terminated before the end of the fixed-term “if the Pendylum Client to which you have been contracted terminate[s] its contract with Pendylum for your services”.

Decision by Motion Judge

The motion judge concluded that since the employee had been employed for less than three months, she was not entitled to any notice of termination. Under the ESA an employer is not required to provide any notice of employment to an employee during the first three months of employment.

Decision by Court of Appeal

The Court of Appeal reversed the motion judge’s decision and found that the termination provisions were void. It ruled that “the terms must be construed as if (the employee) had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void”. In this case, if Ms. Covenoho had been terminated after three months of work, then the termination clause would have violated the ESA because she could have been terminated without any notice of termination (or any payment in lieu of notice) contrary to the ESA.  The court also ruled the employee was entitled to receive the salary that she would have earned for the balance of the fixed-term contract.

Lessons for employers:

1)   Employers should periodically review their termination clauses to ensure they are properly drafted and do not provide shorter notice than required by the ESA.

2)  As we have written about before, it is generally a bad idea to enter into a fixed term contract. If a fixed term contract must be used, it must include an enforceable early termination clause.

On October 16 and October 20 MacLeod Law Firm is holding seminars in Toronto and Barrie that will cover three topics. One topic is why employment contracts need to be reviewed periodically. Cases like this one is one reason but there are other reasons. Information on the seminar can be found here.

For over 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

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