New Court Ruling to Affect Employment Contracts and Termination Provisions Across Canada

A recent Ontario judicial decision will require employers in the province to review their current employment contracts to ensure their termination provisions do not breach the Employment Standards Act (“ESA").  

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. Thus, courts in other provinces could arrive at the same conclusion as their Ontario counterparts. 

What did the Ontario Court decide? 

Recently, 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 
2. A without-cause termination provision attempts to limit an employee termination during the statutory notice period (e.g., defining that an employee would only be paid base salary during notice), as it contravenes the requirement that employees are entitled to “all regular wages” during this period.   

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. 

What happened in Dufault v. The Corporation of the Township of Ignace? 

The complainant entered a fixed-term contract with the defendant for an employment term ending December 31, 2024. On January 26, 2023, her employment was terminated without cause. Upon termination, she was paid two weeks’ termination pay and her benefits were continued for that period.  

The complainant argued that the termination clauses in her contract breached Ontario’s employment legislation and were unenforceable. As a result, she was wrongfully dismissed and entitled to be paid the balance owing under the fixed-term contract since there was no enforceable provision for early termination without cause. 

The defendant maintained that the termination clauses in the employment contract did not breach the Ontario ESA.  

The Court found the termination provisions in the fixed-term contract to be in breach of the employee’s ESA entitlements and, thus, unenforceable. It drew on existing case law to arrive at this decision. (Case law is when judges interpret legislation in a case, and it becomes standard for others to follow in similar cases.) 

According to the Ontario Court of Appeals case law in Howard v. Benson Group Inc. (the Benson Group Inc.), 2016 ONCA 256, an employee terminated without cause during a fixed-term contract that does not include an enforceable provision for early termination without cause is entitled to receive wages and benefits for the unexpired term of the contract.  

The Court decided the employee was wrongfully dismissed and determined damages in her favor for $157,071.57. 

What are some takeaways for employers from this decision? 

• An employment termination clause in Ontario that breaches the ESA could be found unenforceable by an Ontario Court. In such cases, the employer would be owing reasonable notice of termination, which is substantially heftier than ESA notice of termination.  
• This case presents a new development in Ontario case law related to the interpretation of employment contracts (e.g., termination provisions).  
• A without-cause termination provision that gives the employer the “sole discretion” to terminate an employee “at any time” breaches the ESA and could make the entire provision unenforceable.  
• Employers who want to include a just-cause termination provision do not need to define “just cause” or describe the types of behaviour that will constitute just cause.   
•  A termination clause that effectively limits the amount of notice or pay in lieu of notice to ESA graduated notice, but also includes language that withholds minimum employment entitlements from the employee (like “base salary” or severance pay) is very risky. Such a termination clause could be deemed unenforceable for breaching employment legislation. 
• It is important that employers have their employment agreements (i.e., termination clause) regularly reviewed. 

Do you need help understanding how this ruling affects your business? 

If your employment contract goes into litigation, any contractual provision is likely to be interpreted in favour of the employee. It is important that you update your employment contracts, especially the termination provisions, to protect your business from costly, time-consuming litigation.  

Here at Peninsula Canada, we have kept ahead of the curve and prevented the effects of this ruling from affecting our services. Our experts can tailor job contracts to fulfill the specific needs of your business and industry. We can also help you identify any potential issues with the wording of your policies and ensure you are compliant with the latest legislation.  

To learn more about how our HR services can benefit your business, call us today at (1) 833-247-3652.