Regular reviews important to avoid costly risks that could otherwise be avoided
Although a termination clause may initially be enforceable, as time passes and the employment relationship changes, a termination clause may lose its enforceability.
The enforceability of a termination clause is important as it may limit an employee’s entitlements upon termination to only their minimum entitlements under employment standards legislation rather than their common law notice entitlements, which could be up to 24 months of notice or greater.
The following are some of the ways in which a termination clause can lose its enforceability over time:
Change substratum doctrine
The change substratum doctrine provides that if an employee enters into an employment contract that contains a termination clause which specifies the notice period for a dismissal, the termination clause is not enforceable, if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed.
The idea behind the changed substratum doctrine is that with promotions and greater job responsibilities, the substratum of the original employment contract has changed and the termination clause in the original employment contract should be nullified.
This doctrine was recently applied in the decision of Celestini v. Shoplogix Inc., 2023 ONCA 131, where the Ontario Court of Appeal addressed the changed substratum doctrine to determine if a termination clause, which may have originally been valid, was no longer valid and enforceable due to changes over time in the employment relationship.
In Celestini, Stefano Celestini began employment with Shoplogix in 2005 in accordance with a signed employment contract that contained a termination clause. Celestini was employed until the termination of his employment in 2017. Throughout Celestini’s employment, his employment duties were substantially increased, such that they “far exceeded any predictable or incremental change to his role that reasonably would have been expected when he started as Chief Technology Officer in 2005.” Moreover, in 2008, Celestini entered into an Incentive Compensation Agreement, which was a bonus plan for management-level employees.
The trial judge applied the change substratum doctrine and found that given the change to Celestini’s compensation and duties, the change substratum doctrine applied such that the termination clause no longer had force and effect. The trial judge further noted that the employment contract did not contain language which stated that the terms of the employment agreement would continue to apply notwithstanding any changes to Celestini’s responsibilities, which language would have averted the application of the change substratum doctrine.
The Ontario Court of Appeal upheld the trial judge’s findings.
This case demonstrates that where an employment contract contains a termination clause that purports to limit an employee’s entitlements upon termination to only their statutory minimums, and there have been substantial changes to the employment relationship and there is no language in the employment contract to avert the change substratum doctrine, the termination clause will likely be unenforceable.
Accordingly, when drafting an employment contract, it is critical to include language stating that the terms of the employment contract will continue to apply notwithstanding any changes to the employee’s duties, role, job title, compensation, location, and other terms of employment. An employer should have their employment contracts reviewed to ensure that the application of the change substratum doctrine can be avoided.
Other invalid provisions in employment agreement
Another way that an originally valid termination clause becomes invalid is if another provision in the employment contract is found to be invalid.
For example, Wakesdale v. Swegon North America Inc., 2020 ONCA 391, the Ontario Court of Appeal held that as the termination-for-cause provision was invalid, the termination-without-cause - which on its own was valid - was invalidated and of no force and effect.
Given the above, even if a termination without cause clause is valid and enforceable, it can become invalid if another provision in the employment contract is found to be invalid. An employer should have their employment contracts examined to determine whether any clauses are invalid, especially prior to terminating any employees.
Ensuring that an employment contract is valid and fully enforceable is a challenging endeavour for employers, says a lawyer.
Changes to case law related to termination provisions
If a termination clause contracts out of employment standards legislation without providing a greater benefit, this amounts to a breach of the legislation such that the termination clause is invalid and unenforceable.
Termination clauses are heavily litigated, as it is often unclear whether a termination clause on its face violates legislation. Until a Court makes a ruling that specific wording in a termination clause makes it invalid, it is possible the termination clause, as it was originally worded, may still be valid.
In Wakesdale v. Swegon, the Ontario Court of Appeal found that the termination-for-cause provision was invalid, as it breached the Ontario Employment Standards Act, 2000 (ESA) by disentitling an employee to their statutory minimum entitlements upon termination “for cause.” However, the regulations under the ESA only disentitle an employee to their statutory minimum entitlements upon termination that results from an employee being “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.”
Accordingly, since the wording “for cause” or “just cause” did not amount to this higher bar set by the ESA, the termination-for-cause provision was invalid.
Previously, termination-for-cause provisions were given very little attention, and it was only after Wakesdale that many employers realized that their termination-for-cause clauses were now invalid.
An employer should continuously update themselves with case law regarding termination clauses, as a court decision could impact their employment contract and render the termination clauses invalid.
A saving clause at the end of a termination provision did not save the provision from breaching employment standards legislation, an Ontario court ruled.
Updates to employment agreements without consideration
An employment contract requires consideration, such as an offer of employment, to be valid and enforceable.
If there is already an employment contract in place, which includes a valid and enforceable termination clause, and during the employment relationship the employer wishes to add new terms to the employment contract, such as a temporary lay-off clause, the employer must provide fresh consideration for signing the employment contract.
Fresh consideration may include offering a one-time signing bonus or offering additional paid vacation days on a one-time basis in that calendar or fiscal year. Fresh consideration should also not be a de minimis amount.
However, if fresh consideration is not provided, then the employment contract, including the termination clause, will likely be invalid and unenforceable.
Accordingly, failing to provide fresh consideration for updates to an employment contract containing a termination clause will invalidate an originally valid termination clause.
If an employer wishes to update their employment contracts during the employment relationship, the employer should ensure that sufficient consideration is being provided to avoid an invalid termination clause and the consequences that flow.
Termination clauses can no longer be read in isolation of each other – they are valid or invalid as a whole, says an employment lawyer.
Continuing the employment relationship after a fixed-term contract expires
Finally, if an employer hires an employee in accordance with a fixed-term employment contract with a fixed end date, then the termination clause therein is only valid until that end date.
If the employer decides to continue the employment relationship after the end of the fixed-term contract and does not extend it, then the employer may not rely on the termination clause, as it will no longer be valid and enforceable. The other option is to implement a new employment contract that is either fixed-term or not fixed-term and include a valid and enforceable termination clause. Reference should also be made to new consideration being provided for signing the new employment contract.
Given the above, well prior to the end of a fixed-term contract, an employer should either ensure that the employee’s last day of employment coincides with the fixed end date in the employment contact, or that the fixed-term contract is extended or a new employment contract, that is either fixed-term or not fixed-term, is entered into which includes a valid and enforceable termination clause.
An employer’s argument that it didn’t intend to contract out of the ESA didn’t prevent the invalidation of a for-cause termination provision and the entire agreement.
Conclusion
Drafting employment contracts requires a thorough knowledge and application of not only the applicable employment standards legislation, but also a thorough and up-to-date knowledge of case law. Further, familiarity and experience in what can go wrong is required to be able to properly draft an employment contract, especially termination clauses.
It is extremely important for employers to have their employment agreements and hiring letters drafted by an experienced employment lawyer and reviewed on a regular basis to ensure consistency with new court decisions. Failing to do so can cause exposure to liability that could otherwise be avoided.
Ronald S. Minken is the founding lawyer and managing principal at Minken Employment Lawyers, an employment law boutique in the Greater Toronto Area. Ron gratefully acknowledges Tanya Sambi, an employment lawyer at Minken Employment Lawyers, for her assistance in the preparation of this article.
