Another termination clause found to be void

Exclusive to Canadian HR Reporter from Rudner Law.

Does your employment contract say you have the right to dismiss the employee “at any time” or in your “sole discretion”, as long as you provide notice or severance?

Recently, the Ontario Superior Court of Justice found that such language renders the termination clause unenforceable.

Many contracts have such language in place, which means employers would be wise to revisit their employment contracts, or risk substantial liability.

Facts of case involving employment contract

In Dufault v The Corporation of the Township of Ignace, 2024 ONSC 1029, the court held that the termination clause in a fixed-term employment contract violated the Employment Standards Act, 2000 (ESA).

So what happened in this case?

The parties entered into a fixed-term contract set to end on Dec. 31, 2024. On Jan. 26, 2023, the employer terminated the employee’s employment without cause. At the time of dismissal, the employee had an annual base salary of $75,000 and she participated in the employer’s benefits and pension plans.

The employer provided her with two weeks of termination pay and continued her benefits during that period.

The employee sued the employer and the case proceeded to a summary judgment motion. The employee argued that the termination clauses in the fixed-term contract were void and unenforceable as they did not comply with the ESA and sought the balance owing under the employment contract (since absent a valid termination clause, an employer has to pay for the balance of the fixed term).

In particular, the employee’s position regarding the unenforceability of the termination clause was as follows:

• The termination for cause provision permitted the employer to terminate the employee’s employment for conduct falling short of the ESA “wilful misconduct” standard without paying the employee their minimum statutory entitlements.
• The termination without cause provision required the employer to only continue the employee’s base salary during the statutory notice period instead of her “regular wages” as required by section 60 of the ESA.
• The termination without cause provision allowed the employer to terminate the employee’s employment without cause in the employer’s “sole discretion” at “any time.”

The employee argued that due to one or more of the above reasons, the termination clause was unenforceable.

On the other hand, the employer argued that the termination clause did not breach the ESA.

Decision on termination clause

The court agreed with the employee’s position regarding the unenforceability of the termination clause. Specifically, the termination clause failed to comply with the ESA for the reasons put forward by the employee, and as a result, the employer owed the employee the balance owing under the employee’s fixed-term contract, less any amounts already paid to her.

The court stated:

So why is this decision important?

Key takeaways for HR

It seems this is the first time the court found a without cause termination clause to be void and unenforceable because it allowed the employer to terminate the employee’s employment in its “sole discretion” at “any time”.

This decision is an important reminder for employers to ensure they have properly drafted employment agreements, with valid termination clauses, in place.

Employment laws are constantly evolving, and it is critical that employers reach out to an employment lawyer to implement employment contracts that will be worth the paper they are printed on.

Nadia Zaman is a senior associate at Rudner Law in Toronto. She can be reached at (416) 864-8500 or [email protected].