Attention Ontario Employers: Courts Invalidate Termination Clauses for New Reasons
There is a recent and concerning trend of Ontario courts invalidating termination clauses in employment contracts for increasingly technical (and arguably far-fetched) reasons (for example, see here). This is making it more difficult for employers to limit their potential liability when ending employment relationships.
The Ontario Court of Appeal (“ONCA”) recently dismissed an appeal of the controversial trial decision in Dufault v. The Corporation of the Township of Ignance [Dufault], without addressing the most crucial aspect of the decision—that is, whether the lower level court erred in ruling for the first time ever that a termination clause was legally unenforceable due to the clause stating that an employee could be dismissed by the employer “at its sole discretion” and “at any time”.
Further, the Ontario Superior Court of Justice (“ONSC”) in Baker v. Van Dolder’s Home Team Inc. [Baker] recently followed and expanded the controversial new principle from Dufault by finding that a termination clause was legally unenforceable simply because it stated that the employee could be dismissed without cause “at any time”.
Background
In addition to having statutory termination entitlements under employment standards legislation, Canadian employees can also be entitled to substantially more at common law, which is called “reasonable notice”. It varies by jurisdiction, but statutory entitlements are generally capped at several weeks of notice/termination pay, whereas an employee can be entitled to up to 24 months of reasonable notice (or even more in exceptional circumstances) at common law.
There are two circumstances where employees are not entitled to reasonable notice: (i) if there is just cause for their dismissal (which is a very high bar); or (ii) if there is a legally enforceable termination clause in their employment contract. To be legally enforceable, a termination clause must provide the employee with at least their statutory entitlements under employment standards legislation, and it must not potentially violate such legislation in any way in the future. Furthermore, as the ONCA ruled in its landmark decision in Waksdale v. Swegon North America Inc., if any termination clause in an employment contract is legally unenforceable, then it invalidates all termination clauses in the contract (regardless of which one the employer is relying upon under the circumstances).
The ONCA Dismissed the Dufault Appeal, Without Addressing the Crucial Issue
As noted above, the trial court’s decision in Dufault was controversial, in that the court ruled for the first time ever that a termination clause was legally unenforceable because it stated that an employee could be dismissed without cause by the employer “at its sole discretion” and “at any time” (among other reasons). In a nutshell, the court found that this language violated s. 53 of the ESA, which prohibits employers from dismissing an employee at the conclusion of a job-protected leave, and s. 74 of the ESA which prohibits employers from dismissing an employee in reprisal for attempting to exercise their rights under the ESA (for more information on the Dufault trial decision, read our previous blog here).
The court made this ruling despite that: (i) this is arguably an unreasonable interpretation of the language in question; and (ii) it is established law in Ontario that courts assessing termination clauses must seek to determine the mutual and objective intentions of the parties as expressed in the words of the contract, rather than straining to find a means of invalidating the contract in whole or in part. As a result, many employment lawyers expected that Dufault would be overturned on appeal or otherwise not followed by other courts, such that it would not be considered “good law”.
Unfortunately, the ONCA dismissed the employer’s appeal of the Dufault trial decision without addressing the crucial aspect of the decision. This is because the ONCA found that the termination clause was unenforceable for other reasons, such that the court did not need to determine whether the clause violated the ESA by stating that the employee could be dismissed by the employer “at its sole discretion” and “at any time”. This created substantial legal uncertainty as to whether this principle from Dufault was good law or not.
The ONSC Followed and Expanded the Principle from Dufault in Baker
To the surprise of many, and to the dismay of employers, the ONSC followed and expanded the controversial principle from Dufault in its Baker decision. In particular, the court held that a termination clause was legally unenforceable simply because it stated that the employee could be dismissed without cause “at any time”, citing Dufault. This was despite that the clause in Baker did not include any language about the employee being dismissed at the employer’s “sole discretion”, which the court could have used to distinguish this case, but it did not. Thus, Baker followed and expanded the principle from Dufault, effectively invalidating the termination clauses in any contract that allows an employee to be dismissed without cause “at any time”.
The Bottom Line
The Baker decision means that Dufaultis good law for now, unless/until Bakeris overturned on appeal or another trial judge declines to follow Dufault and/or Baker. As a result, employers are strongly encouraged to have their employment contracts reviewed by an experienced employment lawyer (and amended if necessary).
More broadly, in light of this ongoing trend, prudent employers should ensure that the termination clauses in their employment contracts are regularly reviewed and updated to account for ongoing changes in the law—otherwise they may face substantial liability when it becomes necessary to part ways with an employee. This is all the more important now that the trade war between the United States and Canada has commenced, as many employers will soon need to reduce staffing costs in the face of imminent economic challenges.
If you have any questions regarding the enforceability of your current employment contracts or need assistance with preparing contracts with enforceable termination clauses, please do not hesitate to contact us for expert legal advice and guidance.
