Employment contracts typically include at least one clause that dictates what happens if an employee is terminated for cause or without cause. In recent years, significant controversy has surrounded the enforceability of termination clauses as employers strive to craft clauses that do not violate applicable legislation (e.g., the Employment Standards Act, 2000).

This blog discusses whether and under what circumstances termination clauses will be considered valid and enforceable.

Wrongfully Dismissed Employee Contests Validity of Employment Contract

The case of Wilds v 1959612 Ontario Inc. involved a claim of wrongful dismissal. The employee in the case had worked for her former employer as an executive assistant for 4.5 months until the employer terminated her employment without cause. The employee was 52 years old at the time of termination and had signed an employment contract at the outset.

The employment contract included two clauses that discussed termination: one that dictated the terms regarding termination without cause and another that dictated the terms regarding termination for cause. The employer purported to terminate the employee’s employment by the termination without clause provision. After 4.5 months of employment, the employer provided the employee with a letter indicating that her employment had been terminated and that it would pay severance monies by the “termination without cause” provision, so long as the employee signed a full and final release. The employee declined to sign the release and instead commenced legal action for wrongful dismissal in which she asserted that the termination provisions of her employment contract violated the Employment Standards Act, 2000 (the “ESA”) and were thus invalid and inapplicable, as a result of which she should be entitled to reasonable notice damages.

Legal Principles Applicable to Enforceability of Termination Provisions

First and foremost, section 5(1) of the ESA makes it impermissible to contract outside of the law; any employment contract that violates the terms dictated by the ESA will be considered invalid and illegal. Therefore, inclusion in an employment contract of a clause that purports to save the contract in the event any one clause is found to violate the ESA will be invalid:

“Further, “saving provisions” in termination clauses cannot save employers who attempt to contract out of the ESA’s minimum standards, and cannot reconcile a provision that is in direct conflict with the ESA from the outset.  Holding otherwise creates the risk that employers will slip sentences into employment contracts in the hope that employees will accept the terms.  This outcome exploits vulnerable employees who hold unequal bargaining power in contract negotiations.  Moreover, it flouts the purpose of the ESA – to protect employees and to ensure that employers treat them fairly upon termination.  Employers cannot be permitted to draft provisions that capitalize on the fact that many employees are unaware of their legal rights and will often refrain from challenging notice provisions in court.  Attempting to reconcile the provisions of a termination clause with the benefit of hindsight runs counter to the remedial purpose of the ESA.”

Moreover, “At common law, there is a longstanding presumption that an employer cannot terminate employment without reasonable notice. This presumption is rebutted if the contract of employment clearly specifies some other period of notice, whether expressly or impliedly. To rebut this presumption, employers and employees are free to agree to any notice period contractually, provided the agreement respects the minimum standards stipulated in the ESA. If the contractual notice period runs afoul of the ESA, then the presumption is not rebutted, and the employee is entitled to reasonable notice of termination, i.e., to pay in lieu of notice for the reasonable period under the common law.”

For a termination clause to be considered to rebut the presumption of reasonable notice, it must be drafted in clear language that unambiguously outlines the employee’s expectations. If a termination clause is found to be ambiguous, the court will construe that uncertainty in favour of the employee.

Sections 54 and 61 of the ESA dictate that an employee is to be provided written notice of their termination and must be paid termination pay, in a lump sum, upon termination. Section 60 provides that any employee terminated employment must be paid termination pay during the notice period. Such payment must include all regular wages to which the employee is entitled and benefit contributions during the period. The term “wages” is defined by the ESA to include monies due to an employee by an employment contract, any and all payments required by employers under the ESA, and any prescribed allowances.

Application of the Legal Principles to This Case

The court was satisfied that there were many problems with the termination provisions contained in the employment contract in this case, including the fact that the employer demanded the employee sign a full and final release before it would pay her any monies in lieu of notice, which is a violation of section 54 of the ESA. Furthermore, the “termination with cause” provision dictated various categories of “just cause” for termination without notice, including scenarios where an employee accidentally or unknowingly engaged in wrongful behaviour. Such categories “fall short of the statutory exemptions set out in the Regulation” and thus violate the ESA.

The court also noted that the “termination without cause” provision of the contract stated that any payment in lieu of working provided by the employer would include only base salary and health and dental benefits. As noted above, section 60 of the ESA precludes an employer from reducing wages or otherwise altering any condition of employment during the notice period, which means that “employees are entitled to their regular wages and the continuation of all employee benefits”. Section 61 of the ESA dictates that all terminated employees who receive termination pay instead of notice must receive all amounts to which they are entitled under section 60, “which includes all wages and benefits without reduction or alteration.” The employer, in this case, agreed to pay only base salary, which excludes vacation pay, bonus monies, and any other benefits the employee to which the employee was entitled under the contract (for example, life insurance). As such, this constituted another violation of the ESA.

The employer had included a “saving provision” that purported to rectify any violations of the ESA contained in the contract, which, as detailed above, is impermissible under section 5 of the ESA.

Given these conclusions, the court was satisfied that the employment contract in question did violate the terms of the ESA and could not be saved by the “saving provision.” As such, the employment contract was declared null and void, and the employee’s damages were determined by reasonable notice.

Toronto Employment Lawyers Drafting and Reviewing Employment Contracts

Ensure your employment contract is compliant with labour laws and protects your interests. Schedule a consultation with our seasoned employment lawyers at Grosman Gale Fletcher Hopkins LLP in Toronto to review your contract and identify potential vulnerabilities. We are committed to providing comprehensive legal guidance and advocating for your rights. Contact us today online or by calling (416) 364-9599.