Federal employers shouldn’t change employment entitlements during notice period: court

A recent decision from the Ontario Superior Court suggests that federally-regulated employers will be held to the same strict rules as their provincial counterparts in ensuring that termination provisions comply with minimum employment standards.

“The decision in Sager v. TFI International Inc. extends courts’ pro-employee interpretation of termination clauses in the context of minimum  standards legislation to the federal sphere,” says Kyle Lambert, a litigation partner in McMillan LLP’s Toronto office.

Read: Supreme Court decision aggravates termination clause problems for employers

Federally-regulated employers, such as airlines, banks and railways, are subject to the Canada Labour Code, which requires employers to maintain the terms and conditions of employment during the statutory notice period.

Jean-Marc Sager was vice-president of sales and customer care at TFI International Inc. when the company terminated him without cause after less than three years’ service.

His employment agreement provided that, upon termination, he would receive a lump-sum payment equal to “the greater of three months’ base salary or one month base salary per year of completed service to a maximum of 12 months.” The agreement also stated that the payment was “inclusive of any and all requirements” under the labour code.

But Sager was entitled to benefits in addition to his base salary, including a car allowance, group insurance and pension plans and a bonus program. His lawyer claimed that the termination provision was unenforceable because the failure to continue the benefits violated the code.

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The court agreed. Failing to include the benefits in the termination clause, the judge reasoned, amounted to a change in the terms of employment during the notice period and therefore offended the code. The upshot was that the termination clause was unenforceable, entitling Sager to reasonable notice, which the court set at nine months — a far more expensive outcome for TFI than that for which the employment agreed provided.

“The ruling is consistent with decisions of statutory adjudicators, who hear most [Canadian Labour Code] termination cases,” says Andrew Monkhouse of Monkhouse Law Employment Lawyers in Toronto.

What’s most unsettling for employers about the decision, however, is that the court did not address a provision in the labour code which provides that if the termination clause is more beneficial to an employee than the minimum standards legislation, the contract governs.

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“The three months of pay would certainly have amounted to more than the [code] entitlement, including the value of the benefits,”  says Tim Allen of Toronto employment and labour law boutique Sherrard Kuzz LLP. “The problem with that approach, however, may have been that benefits are different than cash, so the comparison isn’t really apples to apples.”

Lambert has a similar view.

“What we can infer  is that the court didn’t want employers lump-summing the value of the employee’s entitlement over the notice period,” he says. “Rather, the term of employment were bound to continue as they were.”

However that may be, employers should take note.

“Federal employers need to know that termination clauses cannot divert from the conditions of employment in order to stand up,” he says. “And if they don’t, employers need to review and change them.”