In Dufault v The Corporation of the Township of Ignace, 2024 ONSC 1029 the Ontario Supreme Court held in favour of a dismissed employee in a Summary Judgment application finding the termination clause of a fixed term employment contract was not enforceable and awarding damages for the remainder of the fixed term.
This decision further illustrates the many ways a termination clause may be held unenforceable and serves as a reference both for attacking an existing termination clause and in drafting a termination clause that does not violate the minimum employment standards. Currently this decision is not reported on CanLii, but Bow River Law has a copy. If you are a lawyer or other professional requiring a copy, please let us know and we will provide you with one.
Facts
The following were the facts as summarized by the Court:
- This was a summary judgement application
- The plaintiff started employment on October 31, 2021 and was dismissed without cause on January 26, 2023
- On November 24, 2022 the parties executed a fixed term employment contract ending on December 31, 2024 containing early termination sections that were in dispute
- The termination clause contained two sections, one for termination “for cause” and the other “without cause”. In summary:
- The “for cause” section limited damages except as provided for in the agreement and provided two examples of “for cause” conduct including “the failure of the employee to perform the services hereinbefore”, and willful negligence or disobedience not condoned by the employer.
- The “without cause” section permitted termination in the employer’s “sole discretion” and “at any time” by providing either a set amount of notice or a period required by the Employment Standards Act (the “ESA”), whichever is greater. The payment in lieu of notice was specified as base salary, and the notice period included the continuation of benefits excluding short term and long term disability benefits.
- The plaintiff (employee) argued the termination clause was unenforceable as it violated the ESA, while the defendant (employer) argued it did not.
Analysis / Conclusion
The Court first reviewed the principles and law relating to the interpretation of employment contracts.
Employment contracts are interpreted differently than commercial contracts in recognition of several basic principles including unequal bargaining power between the employee and employer, the parties’ disparate familiarity with employment standards legislation, the encouragement to draft ESA compliant contracts, drafting clearly written contracts and an interpretation that gives greater benefit to the employee. The court also summarized interpretation principles including a) that an employment contract that is inconsistent with the ESA is invalid regardless of what the employer arranged at the time of dismissal, b) the court should determine what the parties contemplated at the time of entering in the agreement without straining to find ambiguity where none exists, and c) “the court should look for the true intention of the parties – rather than parse the words looking for ambiguity”…
The Court relied on the Waksdale v Swegon North America Inc., 2020 ONCA 391 (“Waksdale”) decision and the Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451 decision for the leading Ontario authority that any invalid section of a termination provision renders the entire termination clause void and unenforceable as the employment agreement must be interpreted as a whole and not piecemeal. Further, it does not matter that the employer did not rely on the offending section of the termination clause at the time of dismissal.
Since this case involved a fixed term contract, if the termination clause were unenforceable, the plaintiff would be awarded damages (severance) for the unexpired term of the employment agreement.
The court then turned its mind to the sections of the termination clause that were alleged to offend the ESA. The Court concluded the termination clause was unenforceable for the following reasons:
- The ESA regulations create a higher standard for just cause compared to the common law. The “for cause” section of the contract imposed a lesser standard and thereby violated the ESA.
- The ESA definition of “wages” is more expansive than that in the employment contract, and the lack of refence to vacation pay or to sick days contravenes the ESA.
- By giving the employer “sole discretion” to terminate employment without cause “at any time”, the contract presumptively contravenes the sections of the ESA that prohibit an employer from terminating employment either following an employee leave (s. 53 ESA) or in reprisal (s. 74 ESA).
In conclusion, the Court awarded damages pursuant to the authority in Howard v Benson Group Inc. (The Benson Group)., 2016 ONCA 256 for the balance of the fixed term.
My Take
The purpose of a termination clause in most cases is to limit an employee’s compensation upon dismissal; whereas the purpose of the common law is to provide reasonable notice to minimize the adverse economic impact of a dismissal on the employee.
By defeating the common law, it is arguable that many termination clauses are attempting to prevent an employee from getting what most people would consider equitable termination compensation at a difficult time in the employee’s life. Judges are people. This is probably the reason courts keep finding new and different ways of striking down termination clauses.
Employers ought to consider the perspective of the employee when drafting (and imposing) employment agreements as well as when deciding how to dismiss an employee, because employers that do not do so will be faced with courts that are looking for ways to step around their contracts. It may also save employers time and legal cost down the road by drafting termination clauses that are less likely to be challenged due to restrictive notice periods and/or by offering notice that aligns with the common law and the employee’s duty to mitigate.
Bow River Law provides these regular legal blog articles for the purposes of legal news, education and research for the public and the legal profession. These articles should be considered general information and not legal advice. If you have a legal problem, you should speak to a lawyer directly.
Bow River Law is a team of knowledgeable, skilled and experienced lawyers handling employment law, human rights (discrimination) and labour law matters. Bow River Law is based in Calgary but we are Alberta’s Workforce Lawyers.
