In line with the ongoing trend of courts finding termination clauses in employment contracts legally unenforceable for increasingly technical reasons, an Ontario court recently ruled that a termination clause was unenforceable because it would allow the employer to dismiss the employee without cause “at its sole discretion” and “at any time”, among other reasons.
In Dufault v. The Corporation of the Township of Ignace, the Ontario Superior Court of Justice (“ONSC”) awarded wrongful dismissal damages to Ms. Dufault because it found that the termination clause in her employment contract was unenforceable due to it: (i) allowing her to be dismissed without notice of pay in lieu of notice for “just cause”; (ii) contracting out of her right to vacation pay days in respect of the statutory notice period upon dismissal without cause; (iii) allowing the employer to provide her with pay in lieu of notice by way of salary continuance, rather than as a lump sum; and (iv) providing that the employer could dismiss her without cause “at its sole discretion” and “at any time”.
Dufault is a highly unfavourable decision for employers because it represents a marked change in the law that may expose many Ontario employers to substantial liability, as discussed in detail below.
Background
Ms. Dufault was employed by the Corporation of the Township of Ignace (the “Township”) as a Youth Engagement Coordinator until she was dismissed without cause approximately 15 months into a 26-month fixed term contract.
Ms. Dufault’s contract contained two termination provisions—one applied if she were dismissed with cause (the “For Cause Clause”), and the other set out her entitlements upon dismissal without cause (the “Without Cause Clause”). The For Cause Clause provided that the Township could dismiss Ms. Dufault for cause at any time without notice or pay in lieu of notice. On the other hand, the Without Cause Clause provided that the Township could dismiss her without cause “at its sole discretion” and “at any time” by providing her with pay in lieu of notice consisting of two weeks of base salary and benefits per full year of service, up to a maximum of four months, subject to the requirements of the Employment Standards Act, 2000 (the “ESA”). Further, this clause provided that the pay in lieu of notice could be provided by way of a lump sum or salary continuance.
Following her dismissal, Ms. Dufault commenced wrongful dismissal litigation against the Township on the basis that the termination clauses were legally unenforceable for violating the ESA, claiming that she was entitled to be paid for the balance of her fixed term contract.
The Court’s Decision
The ONSC ruled that the termination clauses in Ms. Dufault’s contract were legally unenforceable for violating the ESA in four different ways, and it therefore awarded her damages equal to the balance of her fixed term contract.
In reaching this decision, the court found that the For Cause Termination Clause in Ms. Dufault’s contract violated the ESA by providing that Ms. Dufault could be dismissed for cause without notice or pay in lieu of notice. This is because employees are entitled to receive their statutory termination entitlements under the ESA unless they have engaged in “wilful misconduct or neglect of duty” and, conduct which establishes cause for an employee’s dismissal at common law does not necessarily meet this higher standard.
Second, the ONSC found that the Without Cause Clause violated the ESA by seeking to contract out of her right to receive vacation pay in respect of the statutory notice period by providing that she was only entitled to continuation of her base salary and benefits as pay in lieu of notice. This is because s. 60 of the ESA requires that employees be provided with their “regular wages” during the statutory notice period, which includes vacation pay.
Third, the ONSC found that the Without Cause Clause violated the ESA by allowing the Township to provide Ms. Dufault with pay in lieu of notice by way of salary continuance or as a lump sum, in its discretion. This is because s. 61 of the ESA requires that pay in lieu of notice be provided as a lump sum and does not permit employers to provide pay in lieu of notice by way of salary continuance.
Finally, and most notably, the ONSC also found that the Without Cause Clause violated the ESA by providing that the Township could dismiss Ms. Dufault without cause “at its sole discretion” and “at any time”. The court held that this violated the ESA because s. 53 of the ESA prohibits employers from dismissing an employee at the conclusion of a job-protected leave, and s. 74 prohibits employers from dismissing an employee in reprisal for them attempting to exercise their rights under the ESA.
In the result, the Court held that the termination clauses in Ms. Dufault’s contract were legally unenforceable, and it awarded damages for the balance of her fixed term contract, amounting to over $150,000.
The Bottom Line
Dufault is highly unfavourable to employers because it is the first instance of an Ontario court finding a termination clause unenforceable due to it providing that an employee could be dismissed without cause at any time in the employer’s sole discretion. This has serious potential implications for employers because this type of language has commonly been included in termination clauses for decades, meaning that this decision may invalidate such termination clauses and expose many Ontario employers to substantial liability if it ultimately remains good law.
Moreover, it is notable that this decision is arguably a marked departure from the existing law in this area in multiple respects. First, the inclusion of language stating that an employee can be dismissed without cause at any time in an employer’s sole discretion was arguably never intended to allow employers to dismiss employees upon the conclusion of a job-protected leave or in reprisal for them attempting to exercise their rights under the ESA. In that regard, it is well-established law that courts should look for the “true intention of the parties” when interpreting termination clause and they should not “parse the words looking for ambiguity that can be used to set aside the agreement”. Nonetheless, despite citing this case law, the ONSC still found the clause violated the ESA by providing that the Township could dismiss Ms. Dufault at any time in its discretion.
Similarly, the ONSC’s finding that the Without Cause Clause violated the ESA by contracting out of Ms. Dufault’s right to vacation pay during the statutory notice period is also arguably inconsistent with the existing law in this area. In particular, the Ontario Court of Appeal held in Nemeth v. Hatch Ltd. that a termination clause being silent about a particular ESA entitlement is not the same as a termination clause attempting to contract out of it. In Dufault, the Without Cause Clause was arguably just silent on Ms. Dufault’s entitlement to vacation pay in respect of the statutory notice period, rather than providing that she was not entitled to it. This is particularly the case given that the clause provided that her entitlement to pay in lieu of notice under the clause was “subject at all times to the provisions of the [ESA]”.
Crucially, however, Dufault has not been affirmed by an appellate court and it is therefore currently not binding on other trial judges. Thus, there is hope that this decision will not ultimately constitute good law, but only time will tell.
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.
