Key Court Rulings Shaping the Enforceability of Employment Agreements

Make it a Priority to Review and Update Your Employment Agreements

Employment law has been evolving rapidly over the past few years making it critical for employers to keep up to date with new case law. We suggest that employers make it a priority to review and update their employment agreements in light of these recent Ontario employment-related decisions.

A number of recent cases have changed and are continuing to change the likely outcomes of wrongful dismissal litigation in Ontario in favour of employee plaintiffs. These rulings make it easier for employees to establish that their contractual termination rights are unenforceable and to claim reasonable notice at common law in connection with a wrongful termination. The courts have identified the power imbalance between employer and employee as an important factor and have indicated that any drafting ambiguities will be resolved in an employee’s favour. Even unambiguous drafting is likely to be interpreted in an employee’s favour if there is the potential for any termination right to illegally contract out of statutory minimum rights or entitlements under the Employment Standards Act, 2000 (the “ESA”).

The law on the enforceability of termination clauses is continually changing making it more challenging to limit an employee’s right to termination pay to the statutory amounts owing under the ESA or to a contractual formula which is less than reasonable notice of termination under common law. To keep up with these changes in Ontario employment law, we recommend that employers prioritize reviewing and updating their employment agreements on an ongoing basis. Employers can amend agreements with current employees as needed (seeking legal advice to ensure that “fresh” consideration is provided for any such amendments for enforceability purposes), and can revise their employment offer templates for future hires, to maintain enforceable termination rights based on current Ontario law limiting an employee’s entitlement to claim reasonable notice at common law.

Recent Court Decisions Impacting the Enforceability of Employment Agreements

Below are summaries of five recent decisions, which have fundamentally changed an Ontario employee’s rights on a termination of employment. It is likely that the termination provisions contained in many employment contracts drafted before June 2020 (when the first of these cases was decided) or revised before February 16, 2024 (the date of the most recent decision in Dufault v. The Corporation of the Township of Ignace) may now be unenforceable.

1. Waksdale v. Swegon North America Inc. (June 17, 2020)

Unless the conduct which is the basis for a termination for just cause falls within the narrow definition of not trivial and willful misconduct or wilful neglect of duty (the “Wilful Misconduct Standard”) required to constitute cause under the ESA (Section 2(1)(3) of O. Reg.288/01 Termination and Severance of Employment, a termination with just cause requires payment of statutory minimums under the ESA. In Waksdale, the Ontario Court of Appeal determined that all termination rights in an employment contract must be read together and if one termination provision is unenforceable (such as the termination for just cause provision in this case) then all termination provisions are unenforceable The court also limited the applicability of severability clauses in the termination of employment context. A summary of the background and lower court and Court of Appeal decisions was included in our prior Client Update. The Waksdale decision has since been appealed to the Supreme Court of Canada, which declined to hear the appeal. Waksdale remains the law and has been cited in numerous subsequent court decisions as the basis for invalidating contractual termination provisions and awarding reasonable notice at common law to employees. Any provision that can be interpreted as removing the employer’s obligation to provide notice of termination, severance pay or other statutory minimum entitlements in all cases will render all termination provisions in a contract unenforceable. Reasonable notice at common law is generally much higher than statutory minimums or many contractual formulas which seek to limit an employee’s entitlement to severance pay.

Implications for Employers

The Court of Appeal’s decision in Waksdale has been very disruptive and costly for Ontario employers, as it has rendered many existing termination provisions unenforceable. Waksdale was the first decision where a termination without cause provision, which complied with the ESA and was otherwise enforceable on its own, was rendered unenforceable because of a separate invalid termination for just cause provision, where there was no allegation of just cause and the employment contract contained a severability provision.

2. Rutledge v. Canaan Construction Inc. (“Canaan”), 2020 ONSC 4246 (July 9, 2020)

In Rutledge, the Ontario Superior Court of Justice established that even violations of the ESA based on remote, hypothetical fact scenarios may result in the invalidity of termination provisions in employment contracts. A summary of the background and Ontario Superior Court of Justice decision was included in our prior client communication.

Implications for Employers

Rutledge has significant implications for employers, including employers outside of the construction industry. In arriving at this decision, the Court cited jurisprudence stating, “if a provision’s application potentially violates the ESA at any date after hiring, it is void.” The Court further maintained, “even a potential violation of the ESA, no matter how remote, should be unenforceable.”

Following Rutledge, the termination provisions of any employment contract are potentially unenforceable if they do not contemplate severance pay because the employer’s workforce or payroll are too small to meet the statutory threshold.

3. Matthews v. Ocean Nutrition Canada, 2020 SCC 26 (October 9, 2020)

In Matthews, the Supreme Court of Canada determined that employees terminated without reasonable notice are entitled to payouts they would otherwise have received under incentive plans during the reasonable notice period, unless those incentive plans contain “clear and unambiguous” language to the contrary. This has significant implications for employers who are encouraged to review and revise their employment contracts, incentive plans and award agreements as needed to provide a clear waiver of the employee’s right to receive bonuses, continued vesting, new award grants or common law damages in lieu of the foregoing following a termination of employment. A summary of the background and lower court decisions of the Nova Scotia Supreme Court, Nova Scotia Court of Appeal and Supreme Court of Canada decisions were included in our prior client communication.

Implications for Employers

The Matthews judicial decision drastically elevated the standard of precision and clarity to which employment agreements and incentive plans that purport to restrict an employee’s common law entitlements are held. In Matthews, the Supreme Court of Canada determined that only employment agreements, incentive plans and equity grants with “absolutely clear and unambiguous” language, and which contemplate the precise situation at issue before the Court, will be sufficient to exclude common law termination entitlements. Ambiguities will almost invariably be construed in favour of the employee.

Employers are therefore encouraged to review their incentive and bonus plans, as well as their employment agreements, and we suggest seeking legal advice in redrafting or amending any provisions purporting to restrict the availability of entitlements under these plans which are not completely clear and unambiguous.

4. Henderson v. Slavkin, 2022 ONSC 2964 (August 10, 2022)

Background

Rose Henderson (plaintiff) sued Dr. Slavkin and Dr. Kellner (defendants) for wrongful dismissal after receiving (and working) 6 months’ working notice that Dr. Kellner would be retiring from the oral surgeon practice (Dr. Slavkin had already retired) arguing that the employment contract she signed in 2015 (in which she agreed to accept statutory minimum under the ESA on a termination without cause) was unenforceable. The 2015 contract contained a conflict of interest and a confidentiality provision and both of these sections provided that breaches of these clauses constituted cause for termination without notice or payment in lieu of notice.

Ontario Superior Court Decision

The Court determined that the termination without cause provision was not contrary to or inconsistent with the ESA. However, the Court determined that the language in the Confidentiality and Conflict of Interest provisions, which purported to allow for a termination for cause without notice or payment, invalidated all of the termination rights in the employment agreement. Breaches of confidentiality and conflict of interest could fall short of the Wilful Misconduct Standard entitling an employer to terminate employment without notice or payment. The Court held that the subparagraphs of the Conflict of Interest provision were overly broad and ambiguous and were therefore invalid. The Court also held that the Confidentiality provision did not stipulate that the misconduct must be willful and not trivial to support a termination without notice, as required by the ESA, and is therefore invalid.

The Court relied on Waksdale and set aside all of the termination provisions of the employment contract based on the invalid Conflict of Interest and Confidentiality provisions and awarded Ms Henderson common law damages for an 18 month notice period.

Implications for Employer

In reaching its decision, the Court determined that it did not matter: (i) where the provisions that were not consistent with the ESA were contained in the agreement; or (ii) that the plaintiff had agreed to the termination without cause provisions in the 2015 contract and that they were consistent with ESA; or (iii) the defendants provided her with far greater than her statutory minimum or contractual entitlement.

It is not uncommon for references to termination rights to be sprinkled throughout an employment agreement outside of the actual termination provisions. Current employment agreements and offer templates require review to ensure that there is no offending termination language contained in any provision of the contract that would invalidate what would otherwise be enforceable termination rights.

5. Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029 (February 16, 2024)

Dufault is the latest Ontario decision to expand the scope of grounds for determining that termination rights in an employee contract that purport to contract out of ESA minimums are unenforceable ab initio (meaning from the time the contract was entered into).

Background

Dufault’s employment was terminated and she was provided with the statutory minimum 2 weeks’ pay and benefits continuance and she sued her employer for wrongful dismissal and damages for the duration of her fixed-term contract (101 weeks). The termination for cause provision in her employment contract provided the Township could terminate her employment “at any time and without notice or pay in lieu of notice for cause.” The definition of cause in her contract was broader than the Wilful Misconduct Standard under the ESA. The termination without cause provision in her employment contract provided that 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: …” and the entitlement was to continue base salary for a period of the greater of: (i) ESA minimum, or (ii) two weeks per year of service up to 4 months.

Ontario Superior Court Decision

The Court determined that the termination provisions are not enforceable because they contract out of employment standards under the ESA. Specifically, neither the ESA nor its regulations refer to a “for cause” dismissal and the employment contract uses the term “for cause” implying a common law approach to wrongful dismissal. Section 2(1)(3) of Ontario Regulation 288/01 of the ESA defines an employee who is not entitled to notice of termination or termination pay as “[a]n employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” The termination for cause provision was broader than this ESA standard, defining conduct justifying a termination for cause as including, but not limited to, failure to perform services, willful negligence or disobedience not condoned by the Township or resulting in injury or damages. The Court determined that “failure to perform services” is not the same as willful misconduct and there was no mention of the saving provision in the ESA limiting dismissal for conduct “that is not trivial”.

The termination without cause provision was also determined to be unenforceable because it contravened the ESA by referring to payment of “base salary” and because it gave the employer the sole discretion to terminate employment at any time. ection 60 of the ESA provides that “wages” must not be reduced during the statutory notice period as the employee is entitled to receive all “regular wages” and vacation pay forms part of regular wages (as do commissions, bonuses and other incentive payments). The termination provision did not mention vacation pay on termination nor the sick days provided for in the contract or the five days of annual paid leave to compensate for unpaid overtime hours worked. The Court also determined that the contract misstated the ESA by giving the employer the “sole discretion” to terminate the employee’s employment at any time when the ESA prohibits the employer from terminating employment at the end of an employee’s statutory leave (s. 53) or as a reprisal for attempting to exercise a right under the ESA (s. 74).

The defendant employer hasappealed the decision in this case and is also seeking to overturn Waksdale although it has been cited approximately 50 times and appears now to be well-established law.

Implications for Employer

This latest decision has the result of invalidating many employers’ termination provisions, even contracts that have been amended following the Waksdale decision. It is very common to see references to the payment of base salary (rather than the broader ESA term “wages”) and terminations “at any time” in an employment contract. Employment contracts should now be reviewed to delete references to terminations “at any time” or in the employer’s “sole discretion” (or to ensure that the right to terminate at any time remains subject to any limitations under ESA), and to ensure that contractual termination formulas refer to all wages and not only to base salary.

Conclusion

Ontario employers should consider reviewing and amending their current employment agreements and job offer templates to ensure that both the termination for cause and termination without cause provisions as well as every other provision of the agreement or offer comply with the ESA to increase the likelihood of enforceability of termination rights limiting an employee’s entitlement to claim reasonable notice at common law. Employers should amend agreements with current employees which may contain unenforceable termination provisions at the first opportunity in exchange for “fresh” consideration and should seek legal advice on what is required.

Employers in M&A transactions will also need to be careful in making any seller or buyer representations to employees about the terms that govern an employee’s post-transaction employment and the termination of such employment.

For further information concerning these developments, please contact any member of our Employment Law Group.