For several years, Ontario employers have faced considerable uncertainty regarding the enforceability of termination clauses. Decisions from the Ontario Superior Court of Justice, including in Baker v Van Dolder’s Home Team Inc. [Baker] and Li v Wayfair Canada ULC [Li] resulted in conflicting decisions on whether referring to the employer’s ability to terminate employment “at any time,” could render a termination clause in an employment agreement unenforceable. As discussed in our blogs on Baker and Li, the without cause termination provision in Baker was found to be unenforceable, whereas in Li, a similar termination clause that referenced the ability of the employer to terminate employment “at any time” and “for any reason” was upheld to be enforceable.

The Ontario Court of Appeal (“ONCA”) has now provided much needed clarity in releasing its decision in Baker v Van Dolder’s Home Team Inc.; Li v Wayfair Canada ULC, upholding the termination provisions in both Li and Baker, and confirming that the use of “at any time” and “for any reason” does not automatically violate the Employment Standards Act, 2000 [ESA] and invalidate a termination clause.

The Ontario Court of Appeal Decision

In Baker, the termination clause stated:

Termination without cause: we may terminate your employment at any time, without just cause, upon providing you with only the minimum notice, or payment in lieu of notice and, if applicable, severance pay, required by the Employment Standards Act. If any additional payments or entitlements, including but not limited to making contributions to maintain your benefits plan, are prescribed by the minimum standards of the Employment Standards Act at the time of your termination, we will pay same. The provisions of this paragraph will apply in circumstances which would constitute constructive dismissal.

Termination with cause: we may terminate your employment at any time for just cause, without prior notice or compensation of any kind, except any minimum compensation or entitlements prescribed by the Employment Standards Act. Just cause includes the following conduct:

1. Poor performance, after having been notified in writing of the required standard;
2. Dishonesty relevant to your employment (such as misleading statements, falsifying documents and misrepresenting your qualifications for the position you were hired for);
3. Theft, misappropriation or improper use of the company’s property;
4. Violent or harassing conduct towards other employees or customers;
5. Intentional or grossly negligent disclosure of privileged or confidential information about the company;
6. Any conduct which would constitute just cause under the common law or statute.

Similarly, in Li, the termination provision read as follows:

For all purposes in this letter, “Cause” means any willful misconduct, disobedience, or willful neglect of duty that is not trivial and has not been condoned by the Company and that constitutes “cause” under the ESA.

[… ]

The Company may terminate your employment at any time for Cause without notice, pay in lieu of notice, severance, benefits continuance or other compensation or damages of any kind, unless expressly required by the ESA in which case only the minimum statutory entitlements will be provided.

[the “With Cause Provision”]

After your probationary period concludes, in the absence of Cause, the Company may terminate your employment at any time and for any reason by providing you with only the minimum statutory amount of written notice required by the ESA or by paying you the minimum amount of statutory termination pay in lieu of notice required by the ESA, or a combination of both, as well as paying statutory severance pay required by the ESA, providing benefits continuance for the requisite minimum statutory notice period under the ESA and all other outstanding entitlements, if any, owing under the ESA. These payments and benefits shall fully satisfy all of the Company’s notice, severance and benefits continuance obligations upon the termination of your employment, whether arising under the ESA, the common law or this Agreement, and you agree you shall have no further entitlements unless expressly required by the ESA. In no event will you receive less than your statutory minimum entitlements under the ESA. [Emphasis added.]

[the “Without Cause Provision”]

The ONCA confirmed that, while employment agreements possess features that distinguish them from ordinary commercial contracts, including the power imbalance that may exist between employers and employees, they should nevertheless be interpreted by determining the objective intentions of the parties in light of the language used and the surrounding circumstances known to the parties at the time the agreement was formed. The ONCA noted that courts should avoid a legalistic “magic words” approach of interpreting particular words in isolation to determine the legal effect of a contractual provision. Instead, courts should interpret termination provisions in their full contractual context and avoid straining to find ambiguity where none reasonably exists.

Applying those principles, the ONCA concluded that the without cause termination provisions in both agreements complied with the ESA. The ONCA held that, when read in their full contractual context, the phrases “at any time” and “for any reason” could not reasonably be interpreted as permitting an employer to terminate employment contrary to the ESA.

The ONCA explained that the words “at any time” reflect the parties’ mutual intention that a without cause termination may occur and remain legally effective regardless of when it occurs. In rendering its analysis on the clause in Baker, the ONCA did not find that the employer intended to deprive the employee of their rights guaranteed in the ESA by permitting them to terminate the employee’s employment during statutorily protected times.

Similarly, in addressing the termination provision in Li, the ONCA found that the phrase “for any reason” means the termination will be valid and legally effective regardless of the employer’s reason for ending the employment relationship, provided the termination is otherwise lawful and consistent with the agreement. In Baker, the Court further noted that this interpretation was reinforced by multiple provisions throughout the agreement repeatedly expressing that the employer intended to comply with the ESA.

The ONCA also concluded that the with cause termination provision in Baker was enforceable. Notably, although the provision purported to permit termination for cause in circumstances broader than the ESA‘s “wilful misconduct” standard, the ONCA held that the provision expressly provided that employees would receive any minimum entitlements required by the ESA. The ONCA found that this language brought the termination provision back into alignment with the ESA and maintained the enforceability of the clause.

The ONCA also disagreed that an employer should be required to explain the difference between just cause and the ESA wilful misconduct standard in an employment agreement, as it is unclear that doing so would enlighten a regular employee to what their entitlements would be if they were terminated for cause.

Takeaways for Employers

The ONCA has now provided important guidance that the phrases “at any time” and “for any reason” do not automatically render an otherwise enforceable termination clause unenforceable. Employers should consider the following best practices in light of this decision:

1. Review and Update Your Agreements: Given the ONCA’s landmark decision and their guidance on the interpretation of termination provisions, employers should review and update their employment agreements to ensure that their termination provisions align with the clarification provided by the ONCA.
2. Provide Employees with Adequate Time and Consideration for Reviewing Agreements: The ONCA emphasized the importance of giving effect to the parties’ objective intentions. Employers should continue to provide employees with a meaningful opportunity to review employment agreements before signing and ensure that valid consideration is provided to legally enforce the agreement.
3. Review Termination Decisions Carefully: While the ONCA’s decision provides welcome certainty regarding the enforceability of termination clauses, employers should not feel emboldened to terminate employees’ employment with impunity. Even where an enforceable termination clause limits an employee’s entitlements on termination, employers should carefully evaluate the circumstances before proceeding, as the enforceability of the clause is only one component of the overall legal risk associated with a termination decision.
4. Reevaluate Ongoing Wrongful Dismissal Claims: Given the ONCA’s decision in these cases, employers may find that certain termination clauses are less vulnerable to challenge than previously thought. As such, any ongoing claims should be assessed to ensure that the employer’s negotiation strategy accurately reflects its liability with respect to termination entitlements owed to the employee.

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

This information is not intended as legal advice.