Employment Termination Clauses Under Scrutiny – The Latest Update

By: Lesley A. Campbell

In Dufault v. The Corporation of the Township of Ignace , the Ontario Superior Court of Justice found the termination provisions of a fixed-term employment contract did not comply with the Employment Standards Act, 2000 (ESA) because, among other things, it permitted the employer to terminate the employee’s employment without cause in the employer’s “sole discretion” and “at any time,” and was therefore unenforceable. As a result, the Court held that the plaintiff was entitled to damages equivalent to the balance owing under her contract.

The plaintiff entered into a fixed-term contract with the defendant with a term ending December 31, 2024. On January 26, 2023, her employment was terminated without cause. At the time of her termination, the plaintiff had an annual base salary of $75,000 and she participated in the defendant’s benefits and pension plans. Upon termination, she was paid two weeks’ termination pay and her benefits were continued for that period.

At a summary judgment motion, the plaintiff argued the termination clauses in the employment contract were void and unenforceable as they did not comply with the ESA and she was therefore entitled to be paid the balance owing under the fixed-term contract. Specifically, the plaintiff argued the termination clauses were void for the following reasons:

1. The termination for cause provision wrongly allowed the employer to terminate the employee for conduct that falls short of the ESA “wilful misconduct” standard without paying the employee their minimum statutory notice (and severance, if applicable) entitlements.
2. The termination without cause provision wrongly required the employer to only continue the employee’s base salary over the statutory notice period (as opposed to her “regular wages” as required by s. 60 of the ESA).
3. The termination without cause provision wrongly allowed the employer to terminate the employee without cause in the employer’s “sole discretion” at “any time.”

The defendant argued the clauses did not offend the ESA.

The termination clauses are reproduced in part below:

“4.01 The Township may terminate this Agreement and terminate the Employee’s employment at any time and without notice or pay in lieu of notice for cause. If this Agreement and the Employee’s employment is terminated with cause, no further payments of any nature, including but not limited to, damages are payable to the Employee, except as otherwise specifically provided for herein and the Township’s obligations under this agreement shall cease at that time. For the purposes of this Agreement, ‘cause’ shall include but is not limited to the following: (i) upon the failure of the Employee to perform the services as hereinbefore specified without written approval of Municipal Council and such failure shall be considered cause and this Agreement and the Employee’s employment terminates immediately; (ii) in the event of acts of willful negligence or disobedience by the Employee not condoned by the Township or resulting in injury or damages to the Township, such acts shall be considered cause and this Agreement and the Employee’s employment terminates immediately without further notice.

4.02 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: (i) the Township will continue to pay the Employee’s base salary for a period of two (2) weeks per full year of service to a maximum payment of four (4) months or the period required by the Employment Standards Act, 2000 whichever is greater. This payment in lieu of notice will be made from the date of termination, payable in bi-weekly installments on the normal payroll day or on a lump sum basis at the discretion of the Township, subject at all times to the provisions of the Employment Standards Act, 2000. (ii) with the exception of short-term and long-term disability benefits, the Township will continue the Employee’s employment benefits throughout the notice period in which the Township continues to pay the Employee’s salary. The Township will continue the Employee’s short-term and long-term disability benefits during the period required by the Employment Standards Act, 2000 and will pay all other required accrued benefits or payments required by that Act. […]” [Emphasis added]

The Court decided the above clauses did not comply with the ESA for the reasons stated by the plaintiff and, as a consequence, held that the defendant owed the plaintiff the balance owing under the remainder of the fixed-term contract, less any amounts already paid.

This appears to be the first decision where a Court has rendered a without cause termination provision void and unenforceable because the clause allows the employer to terminate the employee in the employer’s “sole discretion” at “any time.” The Court’s decision on this point in full reads as follows:

“[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.”

This case reinforces the importance of employers having their employment agreements, and specifically the termination provisions contained in them, regularly reviewed by their Hicks Morley lawyer.

The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Hicks Morley Hamilton Stewart Storie LLP and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Hicks Morley Hamilton Stewart Storie LLP. ?