Termination clauses in employment contracts must be valid at any point in the employment relationship. If a termination clause could breach the Employment Standards Act, 2000 (the “ESA”) at some point in the future, the clause is void and unenforceable even if the dismissed employee receives all necessary entitlements under the ESA at the time of termination.
While this is evidently something employers must keep in mind when it comes to contracts for permanent, indefinite term employees, the Ontario Court of Appeal recently ruled in its decision in Covenoho v Pendylum Ltd (“Covenoho”) that “future-proofing” is also necessary in termination clauses contained in fixed-term contracts.
While an unenforceable termination clause in an indefinite-term contract will entitle the employee to common law reasonable notice, an unenforceable termination clause in a fixed-term contract entitles the employee to the compensation owed under the contract until the end of the contract’s fixed term.
The Contract in Question
In Convenoho, an employee appealed a Superior Court decision which found that the termination clause in her one-year, fixed-term contract was enforceable. The employee was hired to provide services to a client of the employer on the employer’s behalf. Shortly after the employee was hired, the client created a new policy whereby workers providing services to them must consent to educational and criminal background checks. The employee refused to consent to the checks, so the employer’s client canceled its contract with the employer for the employee’s services. As a result, the employer dismissed the employee less than three months after she started work.
The termination clause stated that if the employer’s client to which the employee was contracted terminated its contract with the employer, the employee would receive no notice. The clause therefore provided that if the employer’s client terminated its contract with the employee, this would lead to the employer dismissing the employee without notice, even though it would not qualify as just cause for termination. The termination clause went on to state that the contract could otherwise be terminated early with two weeks’ written notice.
Since the employee had been employed for less than three months when her employment was terminated, the lower court held that, because the client terminated its contract with the employer for the employee’s services, pursuant to the termination clause in the contract, the employee was not entitled to notice or pay in lieu of notice of termination.
However, the Court of Appeal disagreed, on the basis that if a termination clause could breach the ESA at some point in the employment relationship, the clause is void and unenforceable even if the employee has in fact received all of her entitlements given when termination of her employment happened. If the employee in this case had been let go after beginning her fourth month of employment under the fixed-term contract, she would have been entitled to one week’s notice under the ESA, yet she would have faced the possibility of being fired without cause, due to a client terminating her contract with them, and still not receiving any notice. Since the termination clause was not “future-proof”, on the basis that it could breach the ESA at some point in the future, the entirety of the clause was void. As a result, the employee was entitled to the compensation owed her for the 40 weeks that remained in her fixed-term contract.
The Renewal Clause
Although the Ontario Court of Appeal did not address this issue, as it did not need to in order to find that the termination clause was unenforceable, it is likely that there was a further problem with the termination clause in the fixed-term contract in question. Though the contract was a twelve-month fixed-term contract, it contained a renewal clause that stated that the contract would be automatically renewed for a subsequent twelve-month period unless either the employee or employer gave four weeks’ notice terminating the employment relationship.
The termination clause would likely be void because, if the contract was renewed at least twice and the employee continued to work for three years or more before termination, the two weeks’ notice of termination outlined in the contract would violate the ESA (as she would at the point be entitled to three or more weeks’ notice of termination under the ESA).
What does this case mean for employers?
Termination clauses in both employment agreements for indefinite periods and in fixed-term contracts must outline that the employee will receive at least his or her minimum ESA entitlements if the employment relationship is terminated.
Although the Ontario Court of Appeal does not address the issue, renewal clauses in fixed-term contracts likely could have an adverse impact on enforceability of termination clauses that are not drafted with sufficient care. Because of the renewal clause in Convenoho, it is possible that the employee would have continued working for an indefinite period under the terms of the initial contract. Although the termination clause provided more than the employee’s minimum ESA notice of one week if terminated before the end of the initial one-year term, it was, in our view, unenforceable because of the possibility that the contract would be renewed multiple times, eventually resulting in the termination clause providing less than the employee’s ESA minimums.
For those employers who use fixed-term contracts, this decision likely means that fixed-term contracts without a renewal clause probably would not need to have a termination clause that would guarantee the employee his or her minimum ESA entitlements beyond the term of the contract. However, employers need to carefully consider whether and how fixed-term contracts may be renewed pursuant to the contract so that termination clauses always provide the minimum termination entitlements under the ESA, regardless of when the contract may be terminated during the life of the contract, including during any renewal of the term as permitted by the contract. As such, for contracts with renewal clauses, carefully drafted “future-proof” termination clauses that would continue to be valid pursuant to the ESA no matter how many times the fixed-term contract is renewed are an absolute necessity.
This blog is provided as information and a summary of workplace legal issues.
This information is not intended as legal advice.