Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986
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On appeal from the court of appeal for Ontario
Both appellants began working for the respondent, a car dealer, in 1978, and were discharged in 1985 without cause. At the time they were dismissed M was credit manager and rust‑proofing sales manager and L was sales manager. Each had entered into a contract for employment for an indefinite period which contained a clause allowing the respondent to terminate his employment without cause, in M’s case without notice and in L’s case on two weeks’ notice. Under the provincial Employment Standards Act the appellants were entitled to a minimum notice period of four weeks. After they were dismissed, the respondent paid each of them the equivalent of four weeks’ salary. The trial judge awarded the appellants damages for wrongful dismissal. He found that they were entitled to reasonable notice of termination, and that the period of reasonable notice for M was 7 months and for L, 7½ months. The Court of Appeal reversed the judgments. It found that the contractual notice provisions were null and void, but held that the provisions could nonetheless be used as evidence of the parties’ intention. Since a term that the contracts could only be terminated on reasonable notice was contrary to the parties’ expressed intention, the Court of Appeal found that the appellants were limited to the benefits conferred by the Act and that the respondent had complied with the Act by giving them four weeks’ pay in lieu of notice.
Held: The appeal should be allowed.
Per La Forest, L’Heureux-Dubé, Sopinka, Gonthier, Cory and Iacobucci JJ.: Employment contracts for an indefinite period require the employer, absent express contractual language to the contrary, to give reasonable notice of an intention to terminate the contract if the dismissal is without cause. For purposes of this appeal, this common law principle of termination only on reasonable notice should be characterized as a presumption, rebuttable if the contract clearly specifies some other period of notice, whether expressly or impliedly. What constitutes reasonable notice will vary with the circumstances of each case and will depend on the character of the employment, the length of service, the employee’s age and the availability of similar employment having regard to the employee’s experience, training and qualifications.
Neither the minimum notice periods set out in the Employment Standards Act nor the terms of the two employment contracts operate to displace the common law presumption of reasonable notice. Section 6 states that the Act does not affect the right of an employee to seek a civil remedy from his or her employer, and under s. 4(2) a “right, benefit, term or condition of employment under a contract” that provides a greater benefit to an employee prevails over the standards in the Act. The effect of ss. 3 and 4 of the Act is to make any attempt to contract out of the minimum employment standards of the Act by providing for lesser benefits “null and void”. The two contracts at issue here specify notice periods shorter than the statutory minimum, and the termination clauses are thus null and void, and cannot be used as evidence of the parties’ intention.
Policy considerations support the conclusion that where an employment contract fails to comply with the minimum notice periods set out in the Act, the employee can only be dismissed without cause if he or she is given reasonable notice of termination. An interpretation of the Act which encourages employers to comply with its minimum requirements, and so extends the Act’s protection to as many employees as possible, is to be favoured over one that does not. If the only sanction which employers potentially face for failure to respect the minimum notice periods is an order that they comply with the Act, they will have little incentive to make contracts with their employees that meet the statutory standards. Many individual employees are unaware of their legal rights, and employers can rely on the fact that they will not challenge contractual notice periods below the statutory minimum. It is more consistent with the objects of the Act to take the approach that, if an employment contract fails to comply with the minimum statutory notice provisions, then the presumption of reasonable notice will not have been rebutted.
Per McLachlin J.: Iacobucci J.’s reasons were substantially agreed with, subject to the following comments. Resolution of this case necessarily involves an examination of the principles of law governing implied contractual terms and, in particular, the role to be assigned to the intention of the parties in determining the term to be implied. To succeed in an action for breach of a contract of employment, a plaintiff must establish the existence of a term of the contract entitling him to reasonable notice of termination, and that the term was breached by the employer. A presumption is simply an evidentiary technique and in this case must operate so as to presume the existence of a term of reasonable notice in the contract. The intention of the contracting parties is relevant to terms implied as a matter of fact, but not to those implied as a matter of law, and requirements for reasonable notice in employment contracts fall into the category of terms implied by law. The employer’s legal obligation to give reasonable notice of termination can be displaced only by an express contrary agreement, and there is no contrary agreement here, the Act having rendered the notice provisions in the contracts null and void.
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The judgment of La Forest, L’Heureux-Dubé, Sopinka, Gonthier, Cory and Iacobucci JJ. was delivered by
IACOBUCCI J. — This appeal concerns the contractual rights of employees who are dismissed without cause by their employers. Specifically, where a contract of employment provides for notice periods less than the minimum prescribed by the applicable employment standards legislation, which in this case is the Employment Standards Act, R.S.O. 1980, c. 137 (the “Act”), and absent any claims of unconscionability or oppression, is an employee entitled to reasonable notice of dismissal, or to the minimum statutory notice period? The answer to this question is of considerable importance to employees.
Indeed, it has been pointed out that the law governing the termination of employment significantly affects the economic and psychological welfare of employees. See K. Swinton, “Contract Law and the Employment Relationship: The Proper Forum for Reform”, in B. J. Reiter and J. Swan, eds., Studies in Contract Law (1980) 357, at pp. 360-61 (footnotes omitted):
The law governing termination of employment is obviously of significant importance to an individual worker, for the degree of job security which he is assured depends upon the ease with which the law allows his employer to terminate his employment. Discharge has serious financial ramifications for the individual in that it puts an end to remuneration, as well as to less quantifiable economic benefits such as accrued seniority. Discharge can have ongoing financial effects, as well, for the reason given for termination (if any) may affect accessibility to future jobs as well as entitlement to government benefits such as unemployment insurance. The psychological effects of discharge are also important, because of the disruption in the individual’s life caused by seeking new employment and establishing himself in a new environment.
V. Analysis
A. Introduction
At least on their face, the two contracts at issue in this case represent attempts to contract out of the minimum notice periods required by the Act. Under these circumstances, the question posed by this appeal is deceptively simple: of what significance is an attempt to contract out of the minimum notice requirements of the Act?
Howland C.J.O. held that, although the contractual terms were in breach of the Act, they were nonetheless relevant to determining the intention of the parties as to what the notice period should be. Specifically, Howland C.J.O. held that the terms of the contracts entered into by the parties were such as to make it unnecessary and improper for the court to imply a term of reasonable notice. Instead, Howland C.J.O. gave effect to the intention of the parties, as evidenced by the terms of the contracts they entered into, and held that the appellants were entitled only to the minimum notice period set out in the Act.
With respect, I cannot agree with the reasoning of the Chief Justice of Ontario, and I have come to the conclusion that the appeal must be allowed. I divide my analysis into three parts. In the first part, I discuss the common law presumption that reasonable notice is required to terminate contracts of employment for an indefinite term. In the second part, I review the impact of the provisions of the Act on the two contracts at issue in this appeal. Finally, I turn to a consideration of the policy dimensions of the issue before us.
B. Reasonable Notice at Common Law
The history of the common law principle that a contract for employment for an indefinite period is terminable only if reasonable notice is given is a long and interesting one, going back at least to 1562 and the Statute of Artificers, 5 Eliz. 1, c. 4. The Statute of Artificers prohibited employers from dismissing their servants unless sufficient cause had been shown before two justices of the peace: see S. M. Jacoby, “The Duration of Indefinite Employment Contracts in the United States and England: An Historical Analysis” (1982), 5 Comp. Lab. L.J. 85, at p. 88. By the middle of the nineteenth century, however, English courts were beginning to imply a term into contracts of employment that the contract could be terminated without cause provided that reasonable notice was given. Although it was initially necessary to prove the incorporation of a custom of termination on reasonable notice into the contract in each particular case, the English courts gradually came to accept reasonable notice as a contractual term to be implied in the absence of evidence to the contrary: M. R. Freedland, The Contract of Employment (1976), at pp. 151-54. In Canada, it has been established since at least 1936 that employment contracts for an indefinite period require the employer, absent express contractual language to the contrary, to give reasonable notice of an intention to terminate the contract if the dismissal is without cause: Carter v. Bell & Sons (Canada) Ltd., 1936 CanLII 75 (ON CA), [1936] O.R. 290 (C.A.).
The parties devoted considerable attention in argument before us to the law governing the implication of contractual terms, and specifically to the relevance of the intention of the parties to the implication of a term of reasonable notice of termination in employment contracts. The relationship between intention and the implication of contractual terms is complex, and I am of the opinion that this appeal can and should be resolved on narrower grounds. For the purposes of this appeal, I would characterize the common law principle of termination only on reasonable notice as a presumption, rebuttable if the contract of employment clearly specifies some other period of notice, whether expressly or impliedly.
This is the approach taken by Freedland, supra, who states that, “the pattern of contract now generally accepted and applied by the courts in the absence of evidence to the contrary is one of employment for an indefinite period terminable by either party upon reasonable notice, but only upon reasonable notice” (p. 153). The same approach was adopted by the Ontario Court of Appeal in Prozak v. Bell Telephone Co. of Canada (1984), 1984 CanLII 2065 (ON CA), 46 O.R. (2d) 385. Writing for the court, Goodman J.A. noted at p. 399 that, “if a contract of employment makes no express or specifically implied provision for its duration or termination, there is likely to be implied at common law a presumption that the contract is for an indefinite period and terminable by a reasonable notice given by either party. . .”. Basically, this is also the approach taken by I. Christie, in Employment Law in Canada (1980), at p. 347.
What constitutes reasonable notice will vary with the circumstances of any particular case. The most frequently cited enumeration of factors relevant to the assessment of reasonable notice is from the judgment of McRuer C.J.H.C. in Bardal, supra, at p. 145:
There can be no catalogue laid down as to what is reasonable notice in particular classes of cases. The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant.
Hollingworth J. referred to the factors set out in Bardal in determining what would constitute reasonable notice for the two appellants. His determination in this respect was not challenged in this appeal.
C. The Employment Standards Act
It was acknowledged by the appellants and the respondent that, but for the possible effects of the Act, no issue as to the validity of the employment contracts would have arisen. The presumption at common law that a contract of employment for an indefinite term is terminable only on reasonable notice would have been rebutted by the clear language of the contract specifying shorter notice periods. But what is the effect of the Act?
The Act provides for mandatory minimum notice periods. The provision relevant to the appellants is set out in s. 40(1)(c) of the Act, which provides that an employer must give any employee who has been employed for five years or more but less than ten years four weeks’ notice of termination. Section 40(7)(a) provides that, if the required notice is not given, the employer shall pay the employee an amount equivalent to his or her regular wages for the period of notice.
It is also clear from ss. 4 and 6 of the Act that the minimum notice periods set out in the Act do not operate to displace the presumption at common law of reasonable notice. Section 6 of the Act states that the Act does not affect the right of an employee to seek a civil remedy from his or her employer. Section 4(2) states that a “right, benefit, term or condition of employment under a contract” that provides a greater benefit to an employee than the standards set out in the Act shall prevail over the standards in the Act. I have no difficulty in concluding that the common law presumption of reasonable notice is a “benefit”, which, if the period of notice required by the common law is greater than that required by the Act, will, if otherwise applicable, prevail over the notice period set out in the Act. Any possible doubt on this question is dispelled by s. 4(1) of the Act, which expressly deems the employment standards set out in the Act to be minimum requirements only.
What is at issue in this appeal is the effect, if any, to be given to a term of an employment contract which does not comply with the minimum notice requirements of the Act. Is such a term capable of displacing the common law presumption of reasonable notice? The effect of ss. 3 and 4 of the Act is to make any attempt to contract out of the minimum employment standards of the Act by providing for lesser benefits than those minimum employment standards, “null and void”. The two contracts at issue on this appeal do attempt to contract out of the minimum notice period set out in s. 40(1)(c) of the Act by specifying notice periods shorter than the statutory minimum. Accordingly, the two contracts are not in compliance with the mandatory language of s. 3 of the Act, and those portions of the two contracts specifying the notice periods are “null and void”.
In argument, the respondent accepted that the attempt to contract out of the provisions of the Act was “null and void”, but argued that the documents should be considered as evidence “that contracts were entered into which expressed clearly the intention of the parties with respect to notice of termination.” I cannot accept this argument. In Rover International Ltd. v. Cannon Film Sales Ltd., [1989] 1 W.L.R. 912, the Court of Appeal was faced with a contract which was entirely void. Kerr L.J. refused to look to the terms of the contract to limit the recovery of the appellant in quantum meruit (p. 928):
. . . if the imposition of a “ceiling” in the present case were accepted, then the consequences would be far-reaching and undesirable in other situations which it would be impossible to distinguish in principle. It would then follow that an evaluation of the position of the parties to a void contract, or to one which becomes ineffective subsequently, could always be called for. We know that this is not the position in the case of frustrated contracts, which are governed by the Law Reform (Frustrated Contracts) Act 1943. It would cause many difficulties if the position were different in relation to contracts which are void ab initio. By analogy to [the respondent’s] submission in the present case, in deciding on the equities of restitution the court could then always be called upon to analyse or attempt to forecast the relative position of the parties under a contract which is ex hypothesi non-existent. This is not an attractive proposition, and I can see no justification for it in principle or upon any authority.
In this case we are not faced with an entirely void contract, but a contract of which one clause is null and void by operation of statute. I would nonetheless apply the reasoning of Kerr L.J.: if a term is null and void, then it is null and void for all purposes, and cannot be used as evidence of the parties’ intention. If the intention of the parties is to make an unlawful contract, no lawful contractual term can be derived from their intention. In Erlund v. Quality Communication Products Ltd. (1972), 29 D.L.R. (3d) 476 (Man. Q.B.), Wilson J. was faced with a contract of employment which was void by reason of the Statute of Frauds. Relying on James v. Thomas H. Kent & Co., [1950] 2 All E.R. 1099 (C.A.), Wilson J. held that in the absence of a valid contract, he had no choice but to imply a term that the employee was entitled to reasonable notice.
Moreover, because the Act declares the notice provisions of the contracts in dispute to be null and void, it seems to me that the proper question to ask in determining the parties’ intention is: what did the parties intend should the notice provisions be found to be null and void? There is simply no evidence with which to answer this question. In Suleman v. British Columbia Research Council (1989), 1989 CanLII 2778 (BC SC), 38 B.C.L.R. (2d) 208, Lysyk J., on facts analogous to those in the case at bar, found that there was no evidence of the parties’ intention in the face of minimum employment standards with which the employer was required to comply. Lysyk J. was considering the effect of s. 2(1) of the Employment Standards Act, S.B.C. 1980, c. 10, which is very similar in wording to s. 3 of the Act. Lysyk J. concluded as follows, at p. 214:
I find nothing in the evidence in the present case to warrant the conclusion that the parties, had they turned their minds to the subject, would have agreed to substitute for the void contractual term the minimum period of notice required by statute instead of looking to the common law standard of reasonable notice.
D. Policy Considerations
I turn finally to the policy considerations which impact on the issue in this appeal. Although the issue may appear to be a narrow one, it is nonetheless important because employment is of central importance to our society. As Dickson C.J. noted in Reference Re Public Service Employee Relations Act (Alta.), 1987 CanLII 88 (SCC), [1987] 1 S.C.R. 313, at p. 368:
Work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self-worth and emotional well-being.
I would add that not only is work fundamental to an individual’s identity, but also that the manner in which employment can be terminated is equally important.
Section 10 of the Interpretation Act, R.S.O. 1980, c. 219, provides that every Act “shall be deemed to be remedial” and directs that every Act shall “receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Act according to its true intent, meaning and spirit.” The objective of the Act is to protect the interests of employees by requiring employers to comply with certain minimum standards, including minimum periods of notice of termination. To quote Conant Co. Ct. J. in Pickup, supra, at p. 274, “the general intention of this legislation [i.e. the Act] is the protection of employees, and to that end it institutes reasonable, fair and uniform minimum standards.” The harm which the Act seeks to remedy is that individual employees, and in particular non-unionized employees, are often in an unequal bargaining position in relation to their employers. As stated by Swinton, supra, at p. 363:
. . . the terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does. Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.
Accordingly, an interpretation of the Act which encourages employers to comply with the minimum requirements of the Act, and so extends its protections to as many employees as possible, is to be favoured over one that does not. In this regard, the fact that many individual employees may be unaware of their statutory and common law rights in the employment context is of fundamental importance. As B. Etherington suggests in “The Enforcement of Harsh Termination Provisions in Personal Employment Contracts: The Rebirth of Freedom of Contract in Ontario” (1990), 35 McGill L.J. 459, at p. 468, “the majority of unorganized employees would not even expect reasonable notice prior to dismissal and many would be surprised to learn they are not employed at the employer’s discretion.”
If the only sanction which employers potentially face for failure to comply with the minimum notice periods prescribed by the Act is an order that they minimally comply with the Act, employers will have little incentive to make contracts with their employees that comply with the Act. As Swinton and Etherington suggest, most individual employees are unaware of their legal rights, or unwilling or unable to go to the trouble and expense of having them vindicated. Employers can rely on the fact that many employees will not challenge contractual notice provisions which are in fact contrary to employment standards legislation. Employers such as the present respondent can contract with their employees for notice periods below the statutory minimum, knowing that only those individual employees who take legal action after they are dismissed will in fact receive the protection of the minimum statutory notice provisions.
In my view, an approach more consistent with the objects of the Act is that, if an employment contract fails to comply with the minimum statutory notice provisions of the Act, then the presumption of reasonable notice will not have been rebutted. Employers will have an incentive to comply with the Act to avoid the potentially longer notice periods required by the common law, and in consequence more employees are likely to receive the benefit of the minimum notice requirements. Such an approach is also more consistent with the legislative intention expressed by s. 6 of the Act, which expressly preserves the civil remedies otherwise available to an employee against his or her employer.
Moreover, this approach provides protection for employees in a manner that does not disproportionately burden employers. Absent considerations of unconscionability, an employer can readily make contracts with his or her employees which referentially incorporate the minimum notice periods set out in the Act or otherwise take into account later changes to the Act or to the employees’ notice entitlement under the Act. Such contractual notice provisions would be sufficient to displace the presumption that the contract is terminable without cause only on reasonable notice. This point was recognized by Lysyk J. in Suleman, supra, at p. 214:
An employer who wishes to guard against being called upon to give any more notice or severance pay than legislation demands can readily draw a contractual clause which, in effect, converts the statutory floor into a ceiling. But here the employer has authored a contractual term which simply fails to comply with the law. In such circumstances, it is not evident why the employee should be placed in a worse position than if the contract had said nothing at all about notice of termination.
Finally, I would note that the Act sets out what the provincial legislature deems to be fair minimum notice periods. One of the purposes of the Act is to ensure that employees who are discharged are discharged fairly. In the present case, the employer attempted to contract with its employees for notice periods which were less than what the legislature had deemed to be fair minimum notice periods. Given that the employer has attempted, whether deliberately or not, to frustrate the intention of the legislature, it would indeed be perverse to allow the employer to avail itself of legislative provisions intended to protect employees, so as to deny the employees their common law right to reasonable notice.
VI. Conclusion and Disposition
I would conclude that both the plain meaning of ss. 3, 4 and 6 and a consideration of the objects of the Act lead to the same result: where an employment contract fails to comply with the minimum notice periods set out in the Act, the employee can only be dismissed without cause if he or she is given reasonable notice of termination.
Accordingly, the appeal should be allowed, the decision of the Ontario Court of Appeal set aside, and the judgment of Hollingworth J. restored. The appellants shall have their costs here and in the courts below.
I have had the benefit of reading the reasons of my colleague, McLachlin J. I simply wish to add that, although I agree with her conclusion, I do not find it necessary or advisable to revisit Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), [1987] 1 S.C.R. 711, to dispose of this appeal.
Excerpted from Source: Canadian Legal Information Institute: www.canlii.org