Employers are increasingly aware that courts closely scrutinize employment contracts. In De Castro v Arista Homes Limited [De Castro], the Ontario Court of Appeal (“ONCA”) confirmed that even seemingly minor drafting choices—such as the use of “or” or “shall”—can render a termination clause unenforceable if it contravenes the Employment Standards Act, 2000 [ESA].

Background

In De Castro, the employee was dismissed without cause after nearly five years of service with the employer. At termination, the employer provided four weeks’ pay, consistent with the minimum notice required under the ESA. The employee claimed the termination clause was unenforceable and alleged wrongful dismissal, asserting entitlement to a longer notice period under the common law.

Procedural History

At the lower court, the motion judge held that the employment agreement violated the ESA. Specifically, the motion judge determined that the termination clause could deny the employee notice of termination or termination pay for reasons not permitted under the ESA.

As a result, the motion judge determined the termination clause was unenforceable and awarded the employee eight months’ notice at common law. The employer appealed to the ONCA.

ONCA Decision

The ONCA upheld the motion judge’s decision and dismissed the employer’s appeal, affirming the eight-month notice award.

First, the ONCA set out the limited circumstances under the ESA whichpermit employers to withhold notice of termination or termination pay for cause (i.e., only if an employee engaged in wilful misconduct, wilful disobedience, or wilful neglect of duty that is not trivial and has not been condoned by the employer). The ONCA compared the statutory requirement to the termination clause:

If you are terminated for Cause or you have been guilty of wilful misconduct, disobedience, breach of Employment Agreement or wilful neglect of duty that is not trivial and has not been condoned by [the employer], then [the employer] will be under no further obligation to provide you with pay in lieu of reasonable notice or severance pay whether under statute or common law.

For the purposes of this Agreement “Cause” shall include your involvement in any act or omission which would in law permit [the employer] to, without notice or payment in lieu of notice, terminate your employment [emphasis added].

The ONCA interpreted the use of “or” in the first paragraph and “shall” in the second to indicate that the termination grounds that followed were inexhaustive. As such, the clause theoretically allowed the employer to dismiss the employee without providing statutory termination entitlements for reasons not permitted by the ESA.

Even though the employer did not rely on cause in this case, the ONCA applied the principle from Waksdale v Swegon North America Inc [Waksdale]: if any part of a termination clause violates the ESA (even the “for cause” provision), the entire clause is unenforceable. For further analysis about this principle, please read our blog on the leading case of Waksdale.

Takeaways for Employers

In today’s volatile economic environment—marked by ongoing instability in the Canadian economy and the potential impact of U.S. tariffs—employers may be forced to make difficult staffing decisions. If they have not yet done so, organizations should take this opportunity to ensure that their employment contracts are enforceable. As De Castro illustrates, even a single word can substantially increase liability.

Prudent employers should adopt the following best practices in light of the De Castro decision:

1. Don’t “DIY” Employment Contracts: Employment contracts must be drafted with precision. Employers should avoid relying on online templates or making ad hoc revisions without legal advice and review. Even where an employer intends to comply with the ESA, courts will interpret any ambiguity in favour of the employee.
2. Minor Words, Major Risk: Seemingly minor drafting decisions can carry serious legal consequences. For example, defining “Cause” using the phrase “shall include” could undermine the enforceability of the entire termination clause.
3. Update Existing Agreements: If an employment agreement contains an unenforceable termination clause, employers should enter into new agreements with current employees. Planning ahead can help mitigate the significant costs associated with common law reasonable notice. For more information about the requirements for implementing new agreements, please read our blog on the Giacomodonato v PearTree Securities Inc decision.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.