In a recent decision1, the Ontario Superior Court of Justice found that the termination clause in an employment agreement was unenforceable for, among other reasons, permitting the employer to terminate the employee's employment in its "sole discretion" and "at any time". The decision adds to a growing list of Ontario judgements which have found termination provisions containing common language unenforceable for potentially conflicting with the Ontario Employment Standards Act, 2000 ("ESA").2

What Happened?

An employee entered into a two year fixed-term contract with an employer. The employer terminated the employee roughly two months into their employment relying on a termination clause in the contract.

The employee sued for salary and benefits for the remainder of the term of the contract. The employee argued that the contract clause allowing for early termination was illegal and they were entitled to damages for the balance of the employment contract because, among other reasons, the clause gave the employer the right to terminate the plaintiff's employment in circumstances contrary to the ESA. Specifically, the termination clause said that the employer could terminate the employee's employment without cause "at its sole discretion", and "at any time upon providing written notice".

What Did the Court Decide?

The court restated some of the principles for interpreting employment agreements:

  1. agreements that are not consistent with the ESA are invalid regardless of the actual arrangements made with the employee on termination, and the employee becomes entitled to common law damages;
  2. agreements must be interpreted in their context in a way the parties reasonably expected them to be interpreted at the time they entered into them. The court should not strain to create ambiguity where none exists when interpreting the termination clause; and
  3. when interpreting a termination clause in relation to the ESA, the court should look for the true intention of the parties, rather than parse words to find ambiguity and set aside the agreement.

The court ultimately agreed with the plaintiff and concluded that the termination clauses in the employment contract were not enforceable because:

  1. The agreement gave the employer the right to terminate the agreement "for cause" for reasons which did not meet the standard under the ESA for termination without notice; and
  2. The agreement did not provide the employee with the right to receive their "regular wages" during the notice period upon termination without cause, but instead only their base salary.

The court also found that the employer's ability to terminate the plaintiff's employment at its "sole discretion" "at any time" was contrary to the ESA. The court reasoned that the legislation prohibits employers from terminating an employee in certain circumstances (such as returning from a protected leave or in reprisal for exercising a right). There was no discussion in the decision of how this conclusion was reconciled with the principles of interpretation stated above.

Because the termination clause was void, the court ordered that the employee was entitled to their salary and benefits for the remainder of the fixed-term contract.

Takeaways

It remains to be seen if this decision will be appealed. If not, this decision adds to the growing caselaw voiding termination provisions which has followed the Ontario Court of Appeal's decision in Waksdale v. Swegon North America Inc.3 It also creates further distinction between termination provisions in employment agreements that may be enforceable in other Canadian jurisdictions but not in Ontario.

For employers in Ontario, employment agreements continue to become more difficult to draft in a time where common law notice periods being awarded are also climbing higher. Employers should be regularly reviewing employment agreements to see whether there are potential enforceability issues and whether new contracts should be implemented for new and existing employees.

Footnotes

1. Dufault v. The Corporation of the Town of Ignace, 2024 ONSC 1029 [Decision not yet on CanLII].

2. See our previous bulletins here: Ontario Court of Appeal Casts Doubt on Enforceability of Majority of Termination Provisions and Termination Provisions (Again): Court Decides New Avenue for Rendering Termination Clauses Unenforceable.

3. 2020 ONCA 391. See Ontario Court of Appeal Casts Doubt on Enforceability of Majority of Termination Provisions

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.