Another court ruling raises questions about termination clauses

A recent Ontario Superior Court decision may have some employers wondering once again if they should redraft the termination provisions in their employment contracts, says Toronto employment lawyer Ellen Low.

In Dufault v. The Corporation of the Township of Ignace, Justice H. M. Pierce held that the termination provisions of a fixed-term employment contract were illegal and unenforceable because they did not comply with the Employment Standards Act, 2000 (ESA). 

Among her arguments, the plaintiff, Karen Dufault, took issue with the termination clause in her employment agreement which stated “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.” The court agreed, awarding her $157,000.

Low, principal of Ellen Low & Co.says the ruling has caused a stir in the employment world since the words that were found to invalidate the termination provision – “its sole discretion” and “at any time” – are commonly used in employment contracts. 

‘Great deal of chatter in the employment law bar’

“There is a great deal of chatter in the employment law bar in terms of do we need to redraft all of our employment agreements and what are we going to do with this decision,” she tells LegalMattersCanada.ca“With the greatest of respect to counsel and to the justice in this particular case, I believe this decision will be appealed and it probably should be appealed.

“When we look carefully at the ‘at any time’ argument, quite frankly the Employment Standards Act does not actually prohibit an employer from terminating an employee’s agreement at any time,” adds Low, who was not involved in the case but comments generally.

“Based on the plain language, I can see the argument but I can also see why other people in the bar are not buying it,” she explains.

Court was told Dufault worked for the Township for about 15 months under a fixed-term employment contract until she was terminated without cause. Upon termination, she received two weeks’ notice, which amounted to $2,884.61 in salary, the judgment states.

Low explains that an employee with a fixed-term contract is entitled to be paid to the end of that term “unless they are guilty of willful misconduct such as disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer.”

In her case, Dufault had a 101-week contract, court heard.

Termination clause called unenforceable

Low says Dufault argued the termination clause was illegal and unenforceable on several grounds.

“Her counsel made a number of interesting arguments about what can be considered glaring deficiencies based on the current state of the law with respect to termination provisions,” she says.

“Among other things that was problematic was the provision that contemplated a fixed term agreement with the term of over 12 months but no reasonable provision for an early termination.

“Counsel argued the agreement didn’t reference continuation of vacation pay over the statutory notice period, which is also problematic,” Low adds. “It also provided that the pay in lieu of notice would be paid by way of salary continuance, whereas the ESA, absent written consent to the contrary, requires that statutory pay be paid by lump sum.”

In her ruling, Justice Pierce referenced Waksdale v. Swegon North America Inc., an Ontario Court of Appeal decision that found if any part of a termination provision in an employment agreement was in breach of the ESA, the entire provision is unenforceable.

She noted the following passage from that decision: “An employment agreement must be interpreted as a whole and not on a piecemeal basis. The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA. While courts will permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal.”

Different principles of interpretation examined

Low says the decision reviewed a number of different principles of interpretation specific to termination provisions of employment contracts.

“Plaintiffs’ counsel, myself included, will always try to come up with different ways to get around these types of termination provisions,” she says. “But really it essentially boils down to the overriding principle of contra proferentem, that any deficiency or ambiguity in the employment agreement will result in it being null and void and the most favourable interpretation possible goes to the employee.” 

Low says she has concerns that the language cited in Default as a reason to nullify the termination provision “doesn’t really violate the Employment Standard Act.”

“In my view, just having that language in the termination provision in and of itself probably should not be sufficient to oust the entire agreement,” she says. “However, that certainly does seem to be how plaintiff-side lawyers might be able to use this to attack termination provisions. They are calling out any language that has ‘at its sole discretion’ or ‘at any time.’”

The concept of trying to attack termination provisions to nullify an employment agreement is hardly new, Low says. 

Will use absolutely every tool at their disposal’

“Plaintiff’s counsel quite rightly will use absolutely every tool at their disposal to figure out a way around an otherwise validly constructed termination provision that may not have been brought properly to a plaintiff’s attention,” she says. “Regardless of what the language says, there are still ways in which you can attack a contractual termination provision.

“In this case, counsel made a series of interesting arguments,” Low adds. “But the reason that this one is getting so much attention is that, unlike the relatively well-settled body of case law, this is perhaps the first time that it has been suggested that the ‘at any time’ or ‘at its sole discretion is somehow a violation of the ESA.”

She says it will be interesting to see the fallout from the case.

“Unless this decision is appealed, it creates a possibility where we have all of these lines of cases that are a little bit contradictory and a bunch of different ways to try to get around a termination provision,” says Low. “And if the prevailing understanding is that people are going to use Dufault in the way that they have used Waksdale – which is to point to the words of a clause and say because these words match Dufault or Waksdale then the entire employment agreement is nullified. The practical ramification is if your termination provision contains those words, it might be worth having a conversation with your employment lawyer.”


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