Failing to review employment contracts can be costly

By Tony Poland, LegalMatters Staff • It is clear that employers often fail to review their employment agreements after yet another court ruling found a termination clause to be unenforceable, says Toronto employment lawyer Jeffrey M. Andrew.

Andrew, a partner with Cavalluzzo LLP, says in Tan v. Stostac Inc. the employer’s failure to correctly interpret and apply provisions of the Employment Standards Act, 2000 (ESA) invalidated the employment contract. Subsequently, the worker was entitled to common law notice and considerably more compensation.

“It is a fairly simple issue and pretty well established,” he tells LegalMattersCanada.ca. “In this case, they paid him what they thought they were entitled to under the termination clause. 

“I have seen many employment agreements that stipulate the employer owes a worker nothing if they are fired for cause,” Andrew adds. “The problem is that the ESA, which always applies, is very restrictive in terms of when an employer can terminate you without any payment. The ESA and its regulations provide this when there is “wilful misconduct, disobedience or wilful neglect of duty which is not trivial and condoned” which is much more limited than the broader common law concept of cause.”

He says the company erred by not paying enough attention to the relationship between the Employment Standards Act and the common law and the stipulation that the ESA is a “floor that you cannot go below” go in an agreement.

‘An employer is not permitted to provide anything less than ESA’

 “On its face, the agreement suggests that no payment is owed, even under the ESA, if common law cause exists, even if wilful misconduct, disobedience or wilful neglect of duty does not exist. That’s wrong under the ESA and made the entire termination clause void and unenforceable,” says Andrew, who was not involved in the case but comments generally. “An employer is not permitted to provide anything less than ESA.

“If they do, then the agreement provision at issue is void. And if the terms of the contract are unambiguous or uncertain, the benefit of the doubt, if I can use that non-legal term, is typically extended to the employee,” he adds. “It basically, wipes out any offending clauses and that effectively means that the common law is applied.” 

Court was told Hans Tan was terminated from his managerial job almost five years after he started at Stostac Inc. due to “adverse economic conditions relating to either the pandemic or to supply chain difficulties.”

According to the judgment, the employer was relying on the termination clause in Tan’s employment agreement that stated: “The Employer may end the employment relationship at any time without advanced notice and without pay in lieu of such notice for any just cause recognized at law. 

Subsequent to the probationary period, the Employee understands and agrees that employment may be terminated at any time by the Employer providing the Employee with two (2) weeks of notice, pay in lieu of notice or a combination of both, at the Employer’s option, plus one additional week of notice (or pay in lieu) for each year of completed service to a maximum of eight (8) weeks. In addition, after completing five (5) years of continuous employment, severance pay pursuant to the Ontario Employment Standards Act, 2000 may be payable upon termination of employment in accordance with the terms of the Ontario Employment Standards Act, 2000. Upon receipt of the above notice (and severance pay if applicable) the Employee agrees that no further amounts shall be owing to him/her on account of the termination of the Employee’s employment under statute or at common law. The provisions of the Ontario Employment Standards Act, 2000, as they may from time to time be amended, are deemed to be incorporated herein and shall prevail if greater.”

Several judgments are cited

In his ruling Justice Michael Dineen cites several judgments and states the termination clause “in this case suffers from the same flaw … by giving the defendant the right to terminate the plaintiff’s employment without notice of payment for just cause that might fall short of non-trivial willful misconduct.”

He was not swayed by a “saving provision” in the clause.

“I do not accept that the attempt to incorporate the ESA’s provisions in the final sentence of the clause’s ‘without cause’ portion detracts from the clear assertion of a right to terminate without notice for any just cause,” he writes.

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Dineen referenced Waksdale v. Swegon North America Inc., a landmark Ontario Court of Appeal decision that has had a tremendous impact on employment law.

“As held in Waksdale, the fact that the with cause portion of the clause violates the ESA renders the entire clause void and unenforceable,” he writes. “It does not matter that the plaintiff was not terminated for cause and that the inconsistency with the ESA was not engaged on the facts of this case.”

Andrew says the case again illustrates the importance of understanding how the ESA works and why termination clauses must be carefully considered.

Well-drafted clause can displace common law entitlement

“A well-drafted termination clause in an employment agreement can displace the common law entitlement, which is often greater,” he says. “As long as it does not violate the requirements of the Employment Standards Act.” 

Employers should be aware that a faulty clause remains ineffective from the time the employment contract is accepted by the worker, Andrew says. Changing the terms of the agreement cannot be done without offering the employee consideration, such as extra pay or new benefits.

Courts are aware of the need to protect workers’ rights, he says, noting the judge’s comments in Tan v. Stostac Inc.

“At common law, an employee terminated without cause is entitled to reasonable notice.  Employers and employees may contract out of this entitlement but may not do so in a way inconsistent with the employee’s statutory rights upon termination,” writes Dineen.

“As a result of the power imbalance between employers and employees and the likelihood that many terminated employees may not be aware of or able to enforce their statutory rights, courts are especially vigilant to interpret employment contracts in a way that encourages employers to draft contracts that comply with their statutory obligations.” 

Andrew says as employment law evolves employers may consider revisiting their employment agreements.

“Some don’t even think to call a lawyer until it becomes too late,” he says. “Because there are boilerplate contracts drafted years ago when this issue was not so well delineated in the law, we are bound to see more cases like this lurking out there.