'Waksdale principles don't apply to fixed-term contracts'
“The law on termination clauses is constantly evolving and it's very employee-friendly, so employers should be making notes in their calendars either at year-end or at the beginning of the year to have their contracts reviewed for compliance to make sure that the termination clauses are up-to-date and contain terms that are considered enforceable.”
So says employment lawyer Jeff Rochwerg of Turnpenney Milne in Toronto, after two levels of Ontario courts denied an employer’s claim that unenforceable termination provisions in a fixed-term employment contract also made the provision setting out the end date of the contract invalid.
Losani Homes is a home building company based in Hamilton, Ont. It hired the worker on July 6, 2022, on a fixed-term contract ending on July 6, 2023. The contract provided for an annual salary of $150,000 and included for-cause and without-cause termination clauses that limited the worker’s entitlement to termination pay.
On Jan. 9, 2023 – six months into the worker’s employment - Losani terminated the worker’s employment without cause. It paid her four weeks’ salary, totalling $11,538.
The worker argued that both of the termination clauses in the employment contract contravened the standards set out in the Ontario Employment Standards Act, 2000 (ESA) and, as a result, Losani didn’t have the right to terminate her employment before the end of the one-year fixed term. She sued for her salary for the remaining six months of the contract, without a duty to mitigate her damages.
Balance of fixed-term contract
The worker based her position on the 2016 decision Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256, in which the Ontario Court of Appeal determined that, if parties to a fixed-term employment contract don’t specify a predetermined notice period, the employee is entitled to the wages they would have received to the end of the term. Since the termination clauses were contrary to the ESA and therefore void, there was no predetermined notice period for early termination, the worker argued.
Losani acknowledged that the termination clauses in the contract didn’t comply with the ESA and were void. However, it referred to the Ontario Court of Appeal’s decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391, which found that an employment agreement must be interpreted “as a whole and not on a piecemeal basis.” This meant that when one termination clause in an employment contract contravenes the ESA, all the termination clauses are automatically voided.
The company argued that the clause in the worker’s contract establishing a one-year limit to her employment was effectively a termination clause because it ended employment on a certain date. As a result, under the principles established in Waksdale, the fixed-term clause was also void and the worker was therefore entitled to common law reasonable notice of termination – which was covered by the four weeks’ salary that it had paid the worker upon termination.
“The termination clause was likely pre-Waksdale, and courts are interpreting even more contract language as being unenforceable,” says Rochwerg. “Unless the clauses are absolutely airtight - and there certainly are ways to draft those airtight clauses – then a court is likely going to strike them down and either find that the employee is entitled to common law reasonable notice or the balance of the fixed-term contract.”
The Ontario Superior Court of Justice found that a clause that fixes the term of the contract clearly and unambiguously to a defined limit is different than a clause that provides for early termination. The court in Benson Group established that the employment relationship automatically terminates at the end of a fixed term without any obligation for the employer to provide notice or payment in lieu of notice, but early termination clauses are different because they attempt to limit payment from early termination that the employee would otherwise be entitled to by statute or the common law, said the court.
Termination clauses ‘separate and distinct’ from time limit
The court also found that Waksdale established that courts won’t enforce termination provisions that are illegal in whole or in part, but setting the term limit of an employment contract was not illegal and did not contravene the ESA.
The court determined that when “separate and distinct termination clauses” are void, it doesn’t void the entire contract that includes the time limit of a fixed-term contract.
The law on fixed-term contracts has long been settled and the court was able to fairly easily find that there were two different issues here, says Rochwerg.
“When there's a fixed-term contract with no enforceable termination clause, there's one set of legal principles, and if you're dealing with indefinite-term contracts with termination clauses, that's a second set of legal principles, and the two don't really meet up,” he says. “The employer was trying to argue that the fixed-term provision was in and of itself a termination clause, but that argument was dispensed with by the fact that there was already a termination clause in the fixed-term contract.”
“A termination clause is something that attempts to limit termination entitlements, whereas the fixed-term contract is setting up the duration of the relationship,” adds Rochwerg.
Waksdale principles don’t apply: court
The worker appealed the decision, arguing that the lower court failed to properly apply the principles of Waksdale and maintaining that the invalidity of the termination clauses should void the fixed-term clause, leaving the worker entitled to reasonable notice rather than pay for the balance of the contract term.
The Court of Appeal noted that Waksdale didn’t involve a fixed-term employment contract and it established that if a particular termination clause was void, it voided other termination clauses in order to entitle the employee to reasonable notice. Waksdale didn’t refer to or suggest that an unenforceable termination provision would convert a fixed-term contract into an indefinite-term one that required reasonable notice of termination, said the appeal court.
The Court of Appeal dismissed the appeal, upholding the worker’s entitlement to her salary for the six months remaining on the fixed-term contract at the time of termination.
“In my view, [Losani] was grasping at straws, as the law in Benson Group has been pretty clear on fixed-term contracts for quite a while now,” says Rochwerg. “It was trying to suggest that in light of Waksdale there should be an employer-friendly approach and essentially say that if the termination clause is void, then it voids the entirety of the contract, but the court disagreed and said that contracts can't be read on a piecemeal basis and the Waksdale principles don't apply to fixed-term contracts.”
For Rochwerg, the case is a reminder that employers should use fixed-term contracts with caution.
“Given the short-term nature of most fixed-term arrangements, an employer's exposure is going to be much more limited if they have an indefinite-term contract with an ESA-only termination clause,” he says. “Employers who are contemplating using fixed-term contracts should instead hire employees pursuant to indefinite-term contracts with enforceable ESA-only termination clauses.”
