The Ontario Superior Court of Justice (the “Court”) has issued a decision that will significantly impact the enforceability of termination clauses. Employers are advised to review their existing employment agreements in light of this ruling.
The Court’s decision in Dufault v The Corporation of the Township of Ignace [Dufault], dated February 16, 2024, has the potential to invalidate many termination provisions. The motion judge in Dufault relied on a novel argument to find that the termination clause did not comply with the Employment Standards Act, 2000 [ESA], rendering it unenforceable. Consequently, the employee was awarded damages equivalent to the remaining balance of their fixed-term employment agreement.
While Dufault introduced novel considerations, it is also part of a larger trend of increased court scrutiny of termination provisions. Employees’ persistent efforts to ‘tire kick’ termination clauses over the last decade have persuaded adjudicators to accept these claims and increasingly restrict what is considered an enforceable termination clause.
Background: Termination Clauses and Termination Entitlements
Termination clauses are provisions in an employment contract which set out an employee’s entitlements on termination of their employment.
Under the common law (the body of law made by judges), when employees are dismissed without cause, they are entitled to reasonable notice of termination of their employment, or pay in lieu thereof. In the absence of a termination clause, an employee is entitled to reasonable notice of the termination of their employment under the common law. Common law notice entitlements are usually considerably greater than the minimum entitlements under the ESA, and thus generally are significantly more costly for employers.
Employers may contract out of the obligation to provide common law reasonable notice. To do so, they must include a termination clause in the employment contract that limits the employee’s entitlements upon termination to the minimum entitlements required under the ESA, or to some other specified amount that is greater than the ESA minimums. The ESA minimum entitlements include notice or pay in lieu of notice, severance pay (in some circumstances), and continuation of pension, health and other benefits.
However, termination clauses that provide for less than the minimum standards prescribed by the ESA are deemed void, resulting in employees whose contracts include these void clauses becoming entitled to the much higher common law notice entitlements despite the existence of the termination clauses. Additionally, when employees with fixed-term agreements are dismissed with an unenforceable termination clause, they are entitled to the remaining duration of their agreement without deductions for mitigation.
Over the years, the courts have established many principles and factors to consider in interpreting whether a termination clause provides for all of the minimum standards required by the ESA and whether the clause is therefore enforceable. The clause does not always need to explicitly mention that all ESA entitlements will be provided, but it must not state or imply in any way that they will not be provided.
Facts
After working under a different employment agreement for over a year, the employee in Dufault signed a new fixed-term agreement with the employer on November 24, 2022, with an end date of December 31, 2024. The following is a relevant excerpt of the termination clause contained within the fixed-term agreement:
The [employer] may, at its sole discretion and without cause, terminate this Agreement and the Employee’s employment thereunder at any time upon giving to the Employee written notice as follows […] [emphases added]
Just two months later, the employer dismissed the employee without cause with a balance of 101 weeks remaining on the fixed-term agreement. Relying on what it thought to be an enforceable termination clause, the employer provided the employee with two weeks’ pay in lieu of notice.
In response, the employee initiated a claim against the employer for wrongful dismissal.
Decision
At issue for the Court to determine was whether the termination clause was enforceable, such that the employer could rely upon it to limit the employee’s termination entitlements to their statutory minimums under the ESA. Ultimately, the Court held that the termination clause was unenforceable, and the employee was entitled to the balance of the fixed-term agreement, without any reduction for mitigated damages.
While the Court found the termination clause to be unenforceable for several reasons, most of which were well-established law, the motion judge also relied upon a novel claim to justify their finding. In particular, the employee argued that the inclusion of the phrases “at [the employer’s] sole discretion” and “at any time”, in reference to the employer’s ability to exercise their discretionary right to dismiss the employee without cause at any point, contravened the ESA.
The motion judge agreed with the employee’s argument, as the ESA prohibits employers from dismissing employees in certain circumstances that may arise over the course of the employment relationship. For instance, an employer cannot dismiss an employee returning from an applicable statutory leave under Part XIV of the ESA, such as a parental leave. The ESA also prohibits employers from reprising against an employee by dismissing them after they attempt to exercise their rights under the ESA. The motion judge summarized the deficiency with the employer’s termination clause by stating that “the right of the employer to dismiss is not absolute”, and as such, the termination clause contained in the agreement contravened the ESA.
As the employee entered into a fixed-term agreement with an invalid termination provision, the employer was obligated to pay out the balance of the remaining term to the employee – equivalent to 101 weeks’ pay.
Takeaways for Employers
Dufault marks a significant new development in the ever-changing case law concerning the enforceability of termination clauses. It specifically challenges clauses that purport to allow employers to dismiss employees at their “sole discretion […] at any time”, making them potentially unenforceable and likely entitling employees to much greater notice periods under the common law. Subject to an appellate court overturning this decision (or a subsequent decision following similar principles), this decision will remain “good law” with precedential value.
In response to Dufault, it is crucial for employers to have their employment agreements, workplace polices, and communication strategies legally reviewed to best understand and mitigate the impact of this development on their business. Where their termination clauses are now unenforceable, employers should consider entering into new employment agreements with their employees as soon as possible to avoid the significant costs associated with common law notice entitlements for future terminations. However, employers should be mindful of the fact that simply asking an employee to sign a new employment contract is not enough. Unless certain technical legal requirements are met when the employees sign the new contracts, the contracts will be entirely unenforceable for other reasons—which would lead to the same result of employees being entitled to common law reasonable notice despite the termination provisions.
For more information or assistance in reviewing your existing employment agreements and/or in strategically implementing new and enforceable employment agreements in your workplace, please contact any of our lawyers for guidance.
This blog is provided as an information service and summary of workplace legal issues.
This information is not intended as legal advice.
