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ANOTHER CLAUSE BITES THE DUST: Latest decision of the Superior Court strikes down another termination clause

Stop us if you have heard this before: the Ontario court system’s latest decision undermines the enforceability of employment agreements.

In the recently released decision of the Ontario Superior Court Dufault v. The Corporation of the Township of Ignace, the Court’s reasons for judgment once again demonstrate that not only do employers have to ensure that their employment agreements reference and reflect compliance with statutory requirements, but that it will find ambiguity where none would seemingly exist.

In this case, the Court’s reasoning hinged on three aspects:

1. the “for cause” portion of the termination provision was unenforceable;
2. the “without cause” portion fell short of the total entitlement provided for by the ESA with respect to compensation during the statutory notice period; and
3. the “without cause” portion was in violation of the ESA as it allowed the employer to terminate the employee’s employment “at any time” in the employer’s “sole discretion.”

The Facts

The employee signed a fixed term contract designed to run until December 31, 2024. The employer terminated the employee’s employment on January 26, 2023, leaving a substantial portion of the fixed-term unfulfilled.  The plaintiff then brought a claim for the full value of the remainder of the term.

The relevant language from the contract provided as follows:

4.01 The Township may terminate this Agreement and terminate the Employee’s employment at any time and without notice or pay in lieu of notice for cause. If this Agreement and the Employee’s employment is terminated with cause, no further payments of any nature, including but not limited to, damages are payable to the Employee, except as otherwise specifically provided for herein and the Township’s obligations under this agreement shall cease at that time. For the purposes of this Agreement, “cause” shall include but is not limited to the following:

(i) upon the failure of the Employee to perform the services as hereinbefore specified without written approval of Municipal Council and such failure shall be considered cause and this Agreement and the Employee’s employment terminates immediately;

(ii) in the event of acts of willful negligence or disobedience by the Employee not condoned by the Township or resulting in injury or damages to the Township, such acts shall be considered cause and this Agreement and the Employee’s employment terminates immediately without further notice.

4.02 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:

(i) the Township will continue to pay the Employee’s base salary for a period of two (2) weeks per full year of service to a maximum payment of four (4) months or the period required by the Employment Standards Act, 2000 whichever is greater. This payment in lieu of notice will be made from the date of termination, payable in bi-weekly installments on the normal payroll day or on a lump sum basis at the discretion of the Township, subject at all times to the provisions of the Employment Standards Act, 2000.

(ii) with the exception of short-term and long-term disability benefits, the Township will continue the Employee’s employment benefits throughout the notice period in which the Township continues to pay the Employee’s salary. The Township will continue the Employee’s short-term and long-term disability benefits during the period required by the Employment Standards Act, 2000 and will pay all other required accrued benefits or payments required by that Act.

The Court’s Determination

The Court accepted the employee’s argument that the for-cause provision was not compliant with the ESA as it neither mirrored the specific language of the ESA nor did it restrict the employer’s ability to deny statutory entitlements to only those circumstances prescribed by the ESA.

The Court also agreed with the employee’s contention that the employer’s obligation over the statutory notice period was for more than just “base salary”, determining that this did not mean the same thing as regular wages as required by the ESA, specifically referencing at paragraph 44 of the decision entitlements like sick days and vacation pay and noting those are absent from consideration in the employment agreement.

Finally, the Court also agreed that the employer’s “sole discretion” language was not compliant with the ESA, in that there are specific junctures of the employment relationship at which the employer is prohibited from terminating employment as per the ESA.  In that regard the Court cited sections 53 (after a leave) and 74 (reprisal) as examples.

Given these failures, the Court determined that the termination clauses in the employee’s employment agreement

Takeaways for Employers

A common issue in fixed-term contracts is not accounting for the termination of those contracts other than the expiration of the term.  However, in this case the employer did include language in contemplation of the premature end of the plaintiff’s employment – it just wasn’t good enough, apparently, for the Summary Motions Judge.

With respect to the first two reasons discussed above, these are fairly common and not a huge surprise: we know that the “for cause” language has to meet the post-Waksdale standard, and we know that the employer’s obligations during the statutory notice period have to encompass all forms of compensation to which the employee is normally entitled.  However, the last reason provided is another indicator of the need to scrutinize every aspect of your employment agreement, since one would – we may have thought prior to this decision – have assumed that the implied intent of the language is to exclude statutorily-protected times when an employee cannot be dismissed.  However, in the post-Waksdale era, we should not be surprised that we have yet another reason to review our agreements with a fine-toothed comb for potential pitfalls with respect to ESA compliance.  As always, the team at CCPartners are here to help you review and adjust your contractual language to meet the evolving standards.

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