Firms do not have ‘sole discretion’ to terminate employment contracts

I have written before about how a fixed-term contract can cause major headaches for a firm if the employment relationship does not work out and the employee is terminated. Similarly, if a more typical employment agreement is terminated, an employer will generally owe prior “reasonable notice” of termination.

Employers often try and limit their liability when terminating employees by inserting words into their employment agreements to permit a shorter notice of termination or smaller severance payout (or both). Employees in turn often successfully argue that such clauses are void because many of those clauses fail to adhere to “minimum standards” norms set by legislation.

As a simple example, legislation requires that employers provide health, dental and other benefits when they terminate employment, yet some clauses will say that the benefits end when employment ends. When the clause is declared void, the employer becomes liable for the “reasonable notice” they otherwise owe or becomes responsible to pay the employee until the end of their fixed term of employment. Overcoming a clause is therefore a big win for employees.

Dufault judgment sent ‘shock waves across the employment law bar’

A recent Ontario Superior Court decision, Dufault, provides yet another avenue to attack these clauses in a judgment that has sent shock waves across the employment law bar as it states that two common phrases contained in numerous termination clauses render those clauses null and void.

If this ruling stands, many firms in Ontario will be calling on legal counsel to redraft employment agreements now in existence, something that seems to be happening every couple of years as courts invalidate clauses for numerous and various new reasons.

• Another judicial reminder to draft proper termination clauses
• ESA rights cannot be used as bargaining chips
• No clear answers as to when longer notice periods are required

Court documents in Dufault v. The Corporation of the Township of Ignace state that Karen Dufault was hired on Halloween in 2021. She signed a fixed-term contract in November 2022 to act as the municipality’s Youth Engagement Coordinator but her employment was terminated on a without-cause basis just two months later. The employer tried to rely on a termination clause to end the relationship on minimal notice.

As noted above, in Ontario, it is well established that an employee with a fixed-term contract is entitled to be paid to the end of that term unless an enforceable termination clause provides otherwise. It is also accepted that a contract with a termination clause that violates the Ontario Employment Standards Act (ESA) in any way will be held to be entirely void.

Illegal and unenforceable for five reasons

Dufault argued that she was entitled to be paid to the end of her term because the termination clause in her contract was illegal and unenforceable for five different reasons. In summary, they are:

• The “for cause” portion of the agreement violates the ESA by giving the Township the right to withhold termination pay and severance pay where they must be provided under the statute;
• The termination “for cause” wording in the agreement gives the Township the right to withhold the employee’s statutory termination and severance pay if it has “cause” for termination, invoking the common law standard lower than what is provided by the ESA.
• The employment contract encompasses employee conduct not specified in the ESA.
• The termination clause excludes payment of all “regular wages” and refers only to the employee’s base salary, contrary to s. 60 of the ESA, with no mention of vacation pay.
• The contract seems to give the Township “sole discretion” to terminate the plaintiff’s employment “at any time” when the ESA prohibits the employer from doing so in certain circumstances.

The court sided with Dufault and awarded her damages in the amount of 101 weeks’ base salary and benefits (less damages already paid), for a total award of $157,071.57, which uis what the Township still had to pay under her fixed-term contract. That is a far cry from the paltry two weeks’ termination pay of $2,884.61 the Township had given her by relying on a two-week termination clause.

Two common terms could invalidate many termination provisions

While the first four grounds for invalidating the termination clause have been largely successfully trialled before, Justice H.M. Pierce’s ruling caused a real stir by considering the phrases “its sole discretion” and “at any time” in the clause. She ruled that these terms – commonly used in employment contracts – invalidated the termination provision because the ESA prevents an employer from terminating an employee outright in certain situations.

To give an example, terminating an employee on the conclusion of their parental leave or in reprisal for attempting to exercise a right under the ESA is prohibited.

“Thus, the right of the employer to dismiss is not absolute,” she wrote, stating that the terms “its sole discretion” and “at any time” indicated it was, which is contrary to the ESA.

Dufault is under appeal. However, an attempt by employer counsel to have the Court of Appeal empanel five judges to overturn one or more prior Court of Appeal decisions that set the law in favour of employees and in favour of the Dufault result was dismissed by the appeals court. This increases the possibility that the panel ultimately deciding the appeal will not move the needle in this area of law.

If this is the case, this new way of invalidating employment termination clauses will stand.