Termination clauses in Ontario employment contracts are crucial in defining the conditions under which an employment relationship can end. Although aiming to provide clarity, these clauses are also fraught with difficulties.

The law surrounding termination clauses has undergone another change in a recent case before the Superior Court of Justice. This blog will discuss the case and its potential effect on how termination clauses must be drafted to avoid being struck down by the courts.

Termination Clauses in Ontario

Termination clauses are provisions in employment contracts that outline the conditions under which the employment relationship may be ended. These clauses specify the rights and obligations of both the employer and the employee in the event of termination and typically address essential aspects such as notice periods, termination pay, and other entitlements that may apply when the employment relationship ends.

In Ontario, termination clauses must comply with the Employment Standards Act, which sets out minimum standards for termination pay and notice periods. The Court of Appeal has previously ruled that a termination clause was unenforceable where its “for cause” provisions violated the Employment Standards Act. The “without cause” provision was also void, meaning the employee was entitled to common law notice of payment in lieu.

Employee Brings Claim for Wrongful Dismissal

In Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029, the Superior Court of Justice went further and found that an employer’s discretion to terminate an employee for cause is not unfettered, and drafting a termination clause that gives an employer such discretion is not enforceable.

The plaintiff was an employee of the defendant since October 2021. She signed a fixed-term employment agreement in November 2022, slated to end in December 2024. The fixed-term employment contract included a Waksdale-esque termination clause, where the employer could terminate the contract on a with-cause or without-cause basis. Specifically, the language of the without cause provisions was:

“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…”

In January 2023, she was terminated without cause. She was paid termination pay, and her benefits were continued for the applicable notice period. She then brought a claim for wrongful dismissal and moved for summary judgment.

Plaintiff Argues Termination Clause Violates Employment Standards Act

The plaintiff argued that the termination clause in her employment contract was illegal and could not be enforced because:

1. The clause allowed the employer to withhold termination and severance pay if the plaintiff is terminated for cause, which goes against the Employment Standards Act;
2. The clause let the employer withhold statutory termination and severance pay if they terminate for cause, using a common law standard lower than the Employment Standards Act;
3. The contract included employee conduct that was not covered in the Employment Standards Act, such as a “for cause” dismissal;
4. The clause excluded payment of all “regular wages” and only mentions base salary, which violated the Employment Standards Act; and
5. The clause stated the employer had “sole discretion” to terminate at any time, but the Employment Standards Act restricts termination in certain circumstances.

Conversely, the defendant employer argued that the contract did not violate the Employment Standards Act and that it is unambiguous.

Court Finds Clause Violates Employment Standards Act

The judge first examined the law on the interpretation of employment contracts, which requires courts to interpret it “as a whole and not on a piecemeal basis.” In this sense, the judge confirmed that once a portion of the termination clause violates the Employment Standards Act, the rest of the clause does, too. It is also irrelevant to the interpretation of whether the employer relied on the termination for cause provision for ruling that it would be unenforceable.

Ultimately, the judge found that this case’s fixed-term employment contract violated the Employment Standards Act. The judge noted that the Employment Standards Act did not define for cause, only the situations where an employee would not have the right to termination pay, such as being guilty of willful misconduct. The contract gave the employer the right to withhold termination pay and severance pay in case of dismissal for cause, contravening the Employment Standards Act.

Employer Does Not Have “Sole Discretion”

The judge also agreed with the employee’s arguments regarding the payment of wages and the employer’s discretion. On the latter, the judge noted that the Employment Standards Act prohibited the employer from terminating an employee after an employee’s leave or in reprisal for attempting to exercise a right under the Employment Standards Act. The judge found that the employer’s right to dismiss “is not absolute.”

Prior to this case, employers were required to draft termination provisions carefully so that they did not contravene the Employment Standards Act, specifically as they dealt with for-cause termination. However, with this judgment, employers must be careful in defining their discretion when terminating employees without cause.

Contact the Employment Lawyers at Baker & Company in Toronto for Advice on Employment Agreements and Terminations

At Baker & Company, our trusted employment lawyers help our clients navigate various aspects of employment relationships and workplace disputes, including severance pay, wrongful terminations, contract negotiations and Employment Standards Act compliance. Whether you are an employee seeking assistance with a termination claim, or an employer looking to mitigate risk before taking action, our lawyers are ready to help. To speak with a member of our employment law team, contact us online or call our office at 416-777-0100.