'Employers have to take a hard look not just at their employment agreements, but also policies dealing with employee conduct'
The Ontario Court of Appeal has dismissed an employer’s appeal of a high-profile lower court decision that found termination clauses in an employment contract to be unenforceable due to non-compliance with the province’s Employment Standards Act, 2000 (ESA).
“The courts have told us clearly what an enforceable termination clause looks like, and they’re getting fed up with employers that don't listen and still try to defend illegal clauses,” says Lior Samfiru, national managing partner at Samfiru Tumarkin in Toronto, who represented the worker in the case.
The case dealt with termination clauses that outlined the conditions under which the worker’s employment could be terminated “for cause” or “without cause” in a two-year fixed-term employment contract between the worker and her employer, the Corporation of the Township of Ignace near Kenora, Ont.
The for-cause termination clause stated that the township could terminate the worker’s employment “at any time and without notice or pay in lieu of notice for cause” without termination pay. It also stated that cause “shall include but is not limited to” the failure to perform services without written approval and “acts of wilful negligence or disobedience” that caused injury or damage to the township.
The contract also had a without-cause termination provision allowing the township to terminate the worker’s employment “at its sole discretion… at any time” by providing two weeks’ base salary per full year of service, to a maximum of four months or the statutory minimum, whichever was greater.
Wrongful dismissal suit
The township terminated the worker’s employment two months later and paid her two weeks’ salary while continuing her benefits for two weeks, in accordance with the without-cause termination provision. The worker commenced an action for wrongful dismissal on the basis that the termination clause was unenforceable.
The Ontario Superior Court of Justice found that the for-cause provision contravened the ESA. The provision outlined conduct that was similar to the ESA’s standard for disentitlement to termination and severance pay - acts of wilful negligence or disobedience - but it also said that cause was “not limited to” those examples, leaving the door open for the township to deny termination pay in other situations that were contrary to the ESA’s “wilful misconduct” standard, said the court.
“Under the ESA, an employer can only avoid paying severance in situations where the employee is guilty of wilful misconduct, and that's a very high standard,” says Samfiru. “The termination clause in this case had a very different standard - essentially, it said that the employer can terminate if the employee fails to do a portion of her job, but that definition isn’t exhaustive and the employer can have other reasons to terminate for cause without payment.”
The court also found that the without-cause termination provision breached the ESA by allowing the township to terminate the worker’s employment at any time at its “sole discretion.”
“There are times under the ESA that an employer cannot terminate - for example, when someone is on a protected leave of absence like a parental leave - and the employer doesn't have any discretion,” says Samfiru. “So on that basis, that's unenforceable because [the employer] didn't put any limits to its powers.”
Unenforceable termination provision
With both termination clauses unenforceable, the court determined that the worker was entitled to the balance of her fixed-term contract, which amounted to $157,071.57. The township appealed the decision.
The Court of Appeal agreed with the lower court that the for-cause provision improperly allowed for termination without notice or pay in situations broader than the ESA’s standard for “wilful misconduct.” It noted that the language in the provision set a lower threshold than the ESA permits, and that inclusive language expanded the definition of “cause,” potentially enabling the township to terminate employment for reasons that fell short of the ESA’s stringent requirements, the Court of Appeal said.
In accordance with the precedent established in the Court of Appeal’s decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391, the court held that termination provisions in an employment contract must be read as a whole. If one provision fails to comply with the ESA, all termination provisions are rendered unenforceable, said the court in declining to consider whether the without-cause termination clause complied with the ESA, given that the entire termination provision was already deemed unenforceable.
Damages for balance of fixed term
The appeal court upheld the lower court’s decision that the worker was entitled to damages based on the remaining term of her fixed-term employment contract and dismissed the township’s appeal.
The Court of Appeal’s decision strengthens the lower court decision, which stands for the proposition that an employer that tries to give itself the power to terminate at any time at its discretion cannot do so, says Samfiru.
“Historically, termination clauses have been drafted in a way that says, ‘We're the employer and we can choose to terminate you without cause at any time,’” he says. “This decision now calls that into question - if the standard is going to be, does it breach the ESA, then a clause that says ‘We don't care what the ESA says, we can terminate you at any time’ clearly has to be illegal.”
For Jon Pinkus – a partner at Samfiru Tumarkin in Toronto who also represented the worker alongside Samfiru - the decision is another confirmation that employers can’t sever illegal portions from their termination clause to rely on sections or their actions that don’t breach employment standards - a concept that has deep roots in Ontario and Supreme Court of Canada precedents well before Waksdale.
“The actions of an employer are irrelevant, because it’s the drafting of the illegal language that creates the problem,” says Pinkus. “The Ontario Court of Appeal has observed that if the only penalty to an employer for drafting an illegal clause is that the court will fix it for them, there won’t be any incentive to comply with basic employment standards in the first place.”
“The combined effect of these decisions is going to be felt with respect to that ‘termination at any time’ argument,” adds Samfiru. “A lot of employers are going to have to go back and look at their own termination clauses and make sure that they don't have that flaw.”
Beyond the employment agreement
The Court of Appeal’s support of the Waksdale principle that termination provisions must be read as a whole has repercussions beyond employment contracts themselves, as it can affect other documents that address termination of the employment relationship, according to Samfiru.
“There may be several places where termination entitlements are addressed outside of an employment agreement, such as a confidentiality policy that says a breach will result in termination without notice or a probationary agreement,” he says. “That policy could render unenforceable the termination clause in the employment agreement.”
“We can look now beyond the employment agreement to other documents and policies of the employer, and if they address termination and they're illegal, then everything to do with termination and termination clauses will be illegal as well,” adds Samfiru. “So employers have to take a hard look not just at their employment agreements, but also policies dealing with employee conduct and expectations that say, ‘If anything here you've done wrong, we're going to let you go without payment’ - that could be hugely problematic.”
The decision is also a warning to employers who use fixed-term contracts, says Pinkus.
“There is very little that a fixed-term contract can accomplish that an indefinite-term contract cannot,” he says. “Fixed-term contracts can also lead to expectations of guaranteed employment when the employer may not actually want to communicate that, so using indefinite-term contracts can avoid these pitfalls.”
Strict standards for termination clauses
It's likely courts will continue to hold termination clauses to strict standards in favour of employees, and the next frontier may involve requiring more specific language rather than simply following statutory requirements, says Samfiru.
“It’s not going to make it easier to draft these clauses, because courts are always going to err on the side of the idea that it needs to be clear,” he says. “I don't think we've heard the last from the courts about employers trying to rely on a statute that no layperson is going to understand.”
“The ESA is a very complex piece of legislation when it comes to termination, so if someone’s a layperson, or English is not their first language, and they’re not educated in the law, they're going to be bound to a clause referring to a statute that they can have no hope of understanding when they sign the employment agreement,” adds Samfiru. “I think our courts are going to realize that maybe the better way to do it is to just tell them what they’re going to get, as opposed to referring to a statute that would require them to understand dozens of provisions - it's really about fairness and ensuring that people have the proper opportunity to understand their entitlements.”
