Recent Ontario court decision impacts employment contracts and termination provisions

All employment contracts in the province, and potentially in Canada, are more vulnerable than they were a week ago

Recent Ontario court decision impacts employment contracts and termination provisions
Ed Matei, legal counsel, Peninsula Canada

A recent Ontario judicial decision immediately requires all employers across the province to review their current employment contracts and new hires’ contracts to ensure their termination provisions do not breach the Employment Standards Act (ESA) and be rendered unenforceable, says Peninsula Canada.

Ontario’s Superior Court of Justice in Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029, assessed whether the termination clause in a fixed-term employment contract breached the ESA.

The court decided that a without-cause termination clause is in violation of the ESA when:

  1. The without-cause termination clause gives the employer the “sole discretion” to terminate an employee “at any time,” and/or
  2. A without-cause termination clause that restricts an employee’s ESA entitlements, limiting payment during the termination notice period to only the employee’s base salary.

The court determined that the expressions “sole discretion” and “at any time” suggested giving employers the absolute right to terminate an employee even in cases, for example, where an employee is guaranteed reinstatement after a protected leave or is reinstated for reprisal for exercising a right under the ESA. Such expression, said the court, contravenes the ESA and makes the termination clause unenforceable.

Clauses that breach ESA deemed invalid

Termination clauses that breach the ESA will be deemed invalid regardless of the provisions agreed in the employment contract. Employers face the risk of owing an employee termination notice or pay in lieu at common law, which could be five times more costly than termination notice under the ESA.

“While this is more of an evolution of Ontario laws than a revolution, it is nonetheless a very significant decision,” says Ed Matei, legal counsel at Peninsula Canada. “It potentially heavily impacts employment contracts and termination provisions across every industry in Ontario, and contracts that may have been considered safe and enforceable weeks ago may no longer be. Employers should act fast to ensure they have reliable employment contracts in place should push ever come to shove in trying to enforce them.”

He adds that employment contracts can effectively establish what an employee is owed when they get terminated. With the contract the employer can limit that amount to just the amount that is required by legislation. He says there's a bare minimum that employers must comply with. Employers can’t put any less than that in the contract, but if they do limit it to less than that, then that cap disappears and they leave it up to the courts to decide how much someone is owed and that former employee can sue. “The awards can end up being significantly larger depending on circumstances and this can also incur additional legal fees to go through the process.”

Employers across Canada should take heed of this ruling

Provincially regulated employers across Canada are also advised to take heed of this ruling. The decision stems and “stands on the shoulders” of past case law from the Supreme Court of Canada on how to interpret employment contracts, says Peninsula. Thus, courts in other provinces could arrive at the same conclusion as their Ontario counterparts.

Matei says this court decision once again retroactively makes employment agreements vulnerable to wrongful termination claims from employees. “Employers do their due diligence in protecting themselves by getting contracts prepared that compliant with laws in Ontario. Occasionally, however, a decision like this makes a previously safe contract potentially unenforceable. Clauses that were never before deemed to be contrary to the ESA can now be interpreted as offering less than the statutory minimum protections.

“Companies are suddenly finding themselves again, looking at their contracts and saying, ‘We followed all the rules, we did everything. This language that was fine when we drafted it suddenly isn't’.”

He says employers have a choice at this point. They can hope they are not forced into a position where they need to make difficult decisions or they can be proactive and make sure their contracts are compliant.

“At the end of the day, employers pick their risk level tolerance and they exercise it.”