A termination clause is a provision found in many employment contracts that sets out the employee’s entitlements upon a dismissal without cause.
Typically, a termination clause would provide that the employee’s right to common law notice of termination will be replaced with an alternative arrangement for notice or pay in lieu, which may be more or less generous than common law reasonable notice. Parties have wide latitude to contract out of the common law, as long as the arrangement meets the minimum requirements set out in the applicable employment standards legislation.
Termination clauses are often drafted in favour of employers, providing for significantly less notice or severance than would be required at common law. However, sometimes they can be favourable employees, providing significant job security, as in the case of the proverbial Golden Parachute.
A termination clause that abrogates the employee’s right to reasonable notice at common law needs to be well drafted in order to be enforceable. The jurisprudence is replete with cases where a company tried to rely on a poorly drafted termination clause, only to find it invalid, leaving the company exposed to unanticipated liability for a longer notice period.