Ontario Courts Continue to Find Novel Reasons to Nullify Termination Provisions

In what will be unwelcome but unsurprising news, the Ontario Superior Court of Justice recently accepted a novel argument to render the termination provisions in an employment agreement unenforceable.

In Dufault v. The Corporation of the Township of Ignace (not yet available on CanLII), the employee had been hired by the Township on the basis of a series of fixed-term arrangements. She signed a new fixed-term agreement in November 2022, with an end date in December 2024, but her employment was terminated early, in January 2023. The employment agreement had termination provisions which addressed both termination with and without cause, as follows:

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 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 terminated 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.

(iii) all payments provided under this paragraph will be subject to all deductions required under the Township’s policies and by-laws.

In the circumstances of the termination, the Township provided the plaintiff with two week's pay in lieu of notice and continued benefits coverage (other than pension contributions) for the same period. The employee sued for wrongful dismissal.

The plaintiff challenged the enforceability of the termination on a number of bases, including that the "with cause" provision was broader than the threshold for disentitlement under the Employment Standards Act, 2000 (the "ESA" or the "Act") and its regulations, and that the compensation to be provided under the "without cause" clause was underinclusive, being limited to "base salary" rather than the broader "regular wages" which are required to be paid under the Act. Not surprisingly, both of these arguments were accepted.

The novelty of the decision appeared in the plaintiff's third argument, and the Court's decision on this point. The plaintiff argued that the without cause provision was also defective and offended the ESA by allowing the employer to terminate the employment relationship in its "sole discretion" and "at any time". Plaintiff's counsel argued that there are express reasons and times that an employer may not terminate employment, such as during or after a protected leave (section 53 of the ESA requires that an employee be reinstated to their former position), or in reprisal for exercising rights under the Act (as prohibited by section 74 of the ESA). The Court agreed that an employer's right to terminate without cause is not "absolute", as this clause suggests, and that the language employed in the contract violated the ESA.

Given that there were no enforceable termination provisions remaining, the employee's entitlement was to be determined in accordance with the common law. At common law, the employee was entitled to be paid out for the remaining balance of her contract with the Township, a period of approximately 23 months, which amounted to more than $150,000 in wrongful dismissal damages.

Putting aside the obvious lesson that entering into fixed-term contracts (and terminating them prematurely) should not be taken lightly, the decision provides more evidence of the Courts' dislike for termination provisions which limit employee entitlements to the statutory floor. While it is arguable that the Court's observations about the "sole discretion" and "at any time" language were obiter (i.e., not absolutely necessary to the resolution of the case, as the termination provisions were already rendered unenforceable based on the other arguments), and the decision may yet be appealed, employers should review their employment agreement templates and consider revising their language in the event that this decision stands. Stay tuned for further developments.

Need guidance on the wording of your employment agreements? Contact [email protected] for clear, effective advice.

Operating as Ceaser Work Counsel since early 2014, Lance Ceaser is a 20+ year management-side labour and employment lawyer operating from London, Ontario, where he resides with his lovely spouse, 2 dogs and 2 cats. Lance has provided timely, cost-effective advice to organizations of all sizes in virtually every sector of industry and the public sector throughout his career.