Employer Faces Significant Costs After Court Finds Termination Clause in Fixed-Term Agreement Found Unenforceable
In Tarras v The Municipal Infrastructure Group Ltd. [Tarras], the Ontario Superior Court of Justice (“ONSC” or the “Court”) awarded an employee with $479,166.67 in damages, as well as outstanding vacation pay, incentive compensation, and benefits. These damages represented the balance of his entitlements for the almost two years that remained in his three-year term of employment at the time of his dismissal without cause, due to an unenforceable termination provision in his fixed term employment agreement.
The Tarras decision serves as an important reminder for employers about the risks—and potential costs—of entering into a fixed-term employment agreement where it is not necessary to do so for operational or other business reasons.
The employee was a former owner of the defendant employer, TMIG, before selling his interests in the company to a larger international engineering firm through a share sale. During the share sale, the employee negotiated his employment with the employer as a vice-president under a fixed-term employment agreement with a three-year term (the “Agreement”). The Agreement stipulated that the employee would receive an annual gross base salary of $250,000, in addition other benefits.
Approximately thirteen months into the three-year term, the employer dismissed the employee on a without cause basis. The plaintiff subsequently filed an action against the employer seeking compensation for the balance of the fixed term on the basis that the termination provision in the Agreement violated the Employment Standards Act, 2000 [ESA].
Unenforceable Termination Clause
The termination clause in the Agreement contained subsections addressing terminations “for cause” and “without cause”. The Court held that the “for cause” subsection was unenforceable because it failed to meet the minimum standards under the ESA. Specifically, the “for cause” subsection defined cause in a manner that went beyond the scope of the limited exceptions under the ESA where an employee would not be entitled to receive notice of termination, termination pay, or severance pay that they would otherwise be entitled to receive. In its reasons, the Court followed the principle from the Ontario Court of Appeal’s landmark 2020 Waksdale decision and held that the unenforceable “for cause” subsection subsequently rendered the entire termination clause under the Agreement as void and unenforceable (for more information on the Waksdale decision, see our previous blog).
After holding that the entire termination clause under the Agreement was unenforceable, the Court proceeded to award the employee with damages. The employee was awarded with the remaining 23 months of his fixed-term contract, which amounted to $479,166.67. Additionally, the Court awarded the employee with his outstanding vacation pay, incentive compensation, and other employee benefits owed under the remaining 23-month term of the Agreement.
Takeaways for Employers
The Tarras decision illustrates the impact of the more stringent and technical approach that courts adopt when assessing the enforceability of termination clauses, especially since the Waksdale decision in 2020. Many termination clauses that may have previously been considered as enforceable are now considered unenforceable. Therefore, employers face even greater risks under a fixed-term employment agreements, especially where an employee is dismissed earlier than the end date of the stipulated term under their fixed-term agreement.
If it is not necessary for an employer to enter into a fixed-term employment agreement with an employee for business or other operational reasons, employers should alternatively consider entering into an indefinite term employment agreement to minimize potential liabilities and costs, given the risks they pose. For example, as the Court confirmed in Tarras, an employee does not have an obligation to mitigate their damages under a fixed-term employment agreement. Under an indefinite term employment agreement, however, an employee has a duty to mitigate upon being dismissed from their employment, even if the termination clause under the indefinite term agreement is held to be unenforceable. The duty to mitigate under an indefinite term employment agreement may ultimately reduce some of the damages that an employer may otherwise have to pay an employee under a fixed-term agreement.
It is also important to note that the employer in this case argued that the employee was a sophisticated party, as he had assisted in drafting the fixed-term employment agreement, and had significant commercial experience, especially in light of the employee previously being an owner of the defendant company. The court, however, emphasized that the sophistication of parties is not a consideration that should be afforded any weight in assessing whether a termination clause is enforceable. Rather, the plain wording of the termination clause in an employment agreement, and whether the wording contravenes the minimum standards under the ESA, is the analytical approach that courts will adopt in assessing whether a termination clause is enforceable.