Another Blow to Termination Clauses

Drafting valid termination provisions in an employment agreement can feel like an uphill battle. Every time employers think they have a strong foothold, another case comes along and their footing slips, sometimes by inches, other times by miles. The last several years have been a period of significant slips.

Most recently, an employer’s termination provisions were struck down as invalid due to containing the words “at any time” and at the “sole discretion” of the employer.

Why Do Employers Need Enforceable Employment Agreements with Valid Termination Provisions?

An enforceable employment contract with valid termination provisions can significantly reduce an employer’s cost upon terminating the employment of an employee by limiting the employer’s liability to employment standards minimum entitlements (about 1 week for every year worked to a maximum of 8 weeks in most provinces). Conversely, if an employer cannot rely on an enforceable employment contract with valid termination provisions, the employer’s termination obligations are based on common law termination entitlements, which equal to approximately 1 month for every year worked (but can be adjusted depending on circumstances) up to a maximum of 24-26 months).

Given the drastic difference in liability, employers would be remiss if they did not attempt to limit their employees’ termination entitlements via employment agreements.

Recent History

In 2020, the Waksdale case delivered a very significant blow to the validity of termination provisions in Ontario when the Court found that (a) any employment agreement that allows termination without notice or pay in lieu of notice for “just cause” is offside with the Employment Standards Act, 2000 (ESA) and therefore invalid; and (b) an invalidity in one part of the termination section will invalidate or infect the remainder of the termination section.

In 2022, several cases (see Henderson and Gracias) were decided in favour of the employee where invalidity was found in sections of the employment agreement outside of the termination provision. Specifically, the contracts in question contained clauses (including conflict-of-interest and confidentiality clauses) allowing the employer to terminate the employee for breach of the clauses without providing the employee with notice or pay in lieu of notice. In both cases, the entire termination provisions were struck down as invalid due to being infected by language outside of the termination provision itself which did not conform to the ESA.

In each of Waksdale, Henderson, and Gracias, the employees were awarded common law termination entitlements based on their years of service and other specific circumstances.

The Latest Case to Invalidate Termination Provisions

Now, in 2024 termination provisions are back in the spotlight and on the chopping block. In Dufault v. The Corporation of the Township of Ignace, the employer’s without cause termination provisions stated, in part “The Township 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…” [emphasis added]. The Employee’s counsel successfully argued that the words “at its sole discretion” and “at any time” are offside with the ESA because the ESA contains limited circumstances where the employer cannot terminate the employee’s employment at any time or at the employer’s sole discretion, including as a form of reprisal or upon return from a leave.

In her decision, Madam Justice Pierce of the Superior Court agreed with this argument, stating:

[46] Thirdly, the plaintiff submits that Article 4.02 misstates the ESA when it gives the employer “sole discretion” to terminate the employee’s employment at any time. I agree with this submission. The Act prohibits the employer from terminating an employee on the conclusion of an employee’s leave (s. 53) or in reprisal for attempting to exercise a right under the Act (s. 74). Thus, the right of the employer to dismiss is not absolute.

The invalid wording in this specific section of the employer’s contract rendered the remainder of the termination provisions invalid and the employee became entitled to common law termination entitlements. Ultimately Dufault was awarded common law termination entitlements amounting to just over $157,000.

The Bottom Line for Employers

What this means for employers in Ontario (and across the country) is that it is once again time to review and revisit employment agreements to ensure they are still enforceable and will still validly limit their employees’ termination entitlements to the minimums set out in the ESA or similar legislation in other provinces.