'Every word has to be intentional'

Employers and HR might be concerned — but not necessarily surprised — to hear that yet another employment agreement has been nixed by the courts after the wording in the termination clause was found lacking.

But two employment lawyers speaking to Canadian HR Reporter say all is not lost when it comes to drafting these agreements – it’s just a matter of being really careful.

“I don't know that [this latest decision provides] more clarity or more confusion, it’s just reinforcing the notion that every little thing matters. And you can't take anything for granted as an employer,” says Kelsey Orth, a partner at CCPartners in Brampton, Ont.

Unlike in the past, the courts are just not providing as much benefit of the doubt, says Sean Bawden, a partner at Kelly Santini in Ottawa.

“If you don't say the words, then malfeasance is going to be inferred, not good intentions, which makes it harder; if you're not going to get the benefit of the doubt, then every word has to be intentional.”

Termination clause considered illegal

The Ontario Superior Court of Justice case involved Karen Dufault, a youth engagement coordinator earning $75,000 plus benefits and a pension plan. She started working for the Township of Ignace in October 2021 and signed a two-year fixed-term agreement on Nov. 24, 2022.

But on Jan. 26, 2023, Dufault’s employment was terminated, effective immediately, on a without cause basis. She was paid two weeks’ termination pay, at $2,884, and given two weeks of benefits coverage.

Dufault sued for wrongful dismissal and damages for the duration of the fixed-term contract. She claimed the termination clause was illegal and unenforceable and sought damages for 101 weeks’ base salary and benefits for $157,071.

The termination clause stated that the agreement and Dufault’s employment could be terminated “at any time and without notice or pay in lieu of notice for cause.

“If this agreement and the employee’s employment is terminated with cause, no further payments of any nature, including but not limited to, damages are payable to the employee, except as otherwise specifically provided for herein and the township’s obligations under this agreement shall cease at that time.”

The township also stated it could, “at its sole discretion and without cause,” terminate the agreement and the employee’s employment “at any time upon giving to the employee written notice” that included base salary for two weeks per year of service, up to four months, as required by Ontario’s Employment Standards Act (ESA), payable in biweekly installments.

Ultimately, in the Feb. 16 decision, the court agreed with Dufault. “The termination clauses in the employment contract contravene the ESA and are therefore not enforceable.”

Dufault was awarded total damages of $157,071.

‘For cause’ in Ontario’s ESA

The termination provisions of the employment contract contravened the ESA in several respects, according to the court.

Firstly, Ontario’s ESA and regulations do not refer to a “for cause” dismissal. Instead, they define employees who are not entitled to notice of termination or termination pay as someone “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.”

As a result, “failure to perform services” is not the same as wilful misconduct, said the court.

“The expansive language used in the contract enlarges the criteria for dismissal without notice. As well, no mention is made in the employment contract of the saving provision in the ESA limiting dismissal for conduct ‘that is not trivial.’

“By inserting a ‘for cause’ standard permitting the employer to withhold statutory and severance pay that does not appear in the ESA, the employer conflates grounds for dismissal under the ESA with a common law standard that does not appear in the ESA.”

This recalls the Waksdale decision from 2020, when the court held that if a particular termination provision in the contract violates the ESA, all the other termination provisions in the contract are invalid and unenforceable.

The recent case also provides a reminder that cause does not appear in the ESA, says Bawden.

“I think we're one of the few jurisdictions that I've ever seen where the word ‘cause’ does not appear in the legislation. Ontario has a higher standard.

“And it is now established by the Court of Appeal that there are three categories of cause or dismissal rights in Ontario … but ‘cause’ does not mean that the employee gets nothing. Ontario has a different standard to get to nothing.”

If someone is dismissed for cause in Ontario, they are only entitled to statutory severance, not common law, he says.

“This level of pedantry makes most people's heads hurt. It's far beyond common knowledge — employees don't understand it and employers don't understand it. Frankly, until recently, I don't think the courts fully understood it. It is hyper complicated and I don't think anyone's enjoying it.

“It requires an examination of too many concepts to answer the question posed by both sides: ‘How much do I owe this person?’ which is really the bottom line that anyone cares about. And answering that question has become significantly harder in Ontario.”

There are a few ways of dealing with the post-Waksdale obligations of the employer, says Orth.

“One is to ensure that the only way that you express a dismissal for cause matches exactly the words of the ESA. Or if you're offering more than ESA entitlements, you can say that a dismissal for cause will result in no payments other than your ESA minimum,” he says.

“You could theoretically have just cause at common law, which would mean that the employee would not get what they're entitled to at common law and/or under their agreement, but it might not meet the standard of the ESA with respect to the willful misconduct and so on, and therefore, they would still get their statutory entitlements.”

‘Base pay’ inclusion contravenes ESA

Also an issue? The “without cause” provisions of the township’s contract contravened the ESA. That’s because the termination clause provides for payment of “the employee’s base salary for two weeks per year of service to a maximum of four months or the period required by the ESA, whichever is greater.” However, the ESA provides that wages may not be reduced during the notice period, when the employee is entitled to receive all “regular wages,” said the court.

In addition, the legislation requires an employer to pay a lump sum equal to the amount that would have been paid if working notice of termination had been given, which could include commissions, vacation pay, sick days, overtime hours.

“That one is nuanced, but I don't necessarily think is wrong because of the way the ESA is worded in terms of the employer’s obligations during the notice period,” says Orth.

The ESA says that during a statutory notice period, an employer must maintain “anything and everything” that's part of the compensation package, he says.

“Not that it was necessarily a direct factor in this case, but there has been litigation around bonus entitlements and those kinds of things where it's pretty clear now, if there's additional compensation that is or come due during the statutory notice period, that's owed to the employee.

“And so in this case, it was about the fact that she earns more than just base salary. And by limiting it to just base salary during the statutory notice period, the employer was offside.”

It’s a semantical point, says Bawden, with the ESA requiring the payment or continuation of wages that can include more than base salary, such as bonuses or commissions.

“By attempting to limit the employee’s recovery to only base salary, and not hard ‘wages,’ that again presents as an attempt to contract out of the ESA as minimum requirements,” he says.

“Intellectually, yes, that is correct. But I think most people would see this as an exercise in pedantic word parsing — and very frustrating because [the employer might think] ‘That's not what I meant.’”

It’s similar to an employer using “cause” colloquially instead of intentionally, says Bawden; however, the courts are saying, “No, employers, when you draft a contract, every word we're going to assume that you are using intentionally and with full knowledge of how those words are used and defined in ESA,” he says.

‘Sole discretion’ to terminate employment

Another error by the Township of Ignace was in misstating the ESA when it said it had “sole discretion” to terminate Dufault’s employment at any time, said the court.

“The Act prohibits the employer from terminating an employee on the conclusion of an employee’s leave (s. 53) or in reprisal for attempting to exercise a right under the Act (s. 74). Thus, the right of the employer to dismiss is not absolute.”

The courts are more and more apt to apply “the finest lens of scrutiny” to the language in these agreements to see if there's any way that they might run afoul of the legislative requirements, says Orth, citing the need for precision and attention to detail.

“To a certain extent, it feels like, as employer counsel, we have to anticipate where the next challenge might come from,” he says.

“You really have to go back and scrutinize your language and say, ‘OK, is there any possible suggestion that my language implies that I'm trying to get out of the ESA or could be construed to mean that we are somehow saying ESA doesn't apply here?’”

While some people might think the courts are being ridiculous, Bawden says the word choice to avoid this issue is not that complicated.

“Intuitively, most people accept that employers cannot let people go, for whatever reason, for all reasons. There are some prohibited reasons. And the ESA says that you can't contract out of the ESA’s protections, and that is ostensibly what this contract did.”

And while some might say we should just give effect to the intention of the parties, he says, “that’s, rightly or wrongly, not how employment law works. And so that commercial law principle just has no application here.”

The use of words or phrases like “sole discretion” and “at any time” can be used, as long as there’s a qualifier, says Bawden, such as “at anytime not prohibited by law.”

“If you don't add those caveats, the court is going to presume that you didn't intend to preserve them — or at least that's what this decision implies.”

Takeaway for HR: review agreements

We’ve heard it many times before but this case serves as yet another reminder to review your employment agreements to ensure compliance.

While that might sound like a daunting, costly or time-intensive endeavour, it’s still advisable, according to Bawden.

“If you're a large, sophisticated employer with an in-house HR team, it probably makes sense — at least annually — to have them reviewed or, more realistically, when you're getting a new agreement done for a new hire,” he says.

“Don't presume that your old template is still good — go back to your employment counsel and say, ‘Here's our template, has anything changed, do we need to update it for this new hire?’”

Secondly, if an issue is discovered with this review, you can get ahead of it, says Bawden.

“Employers should be saying, ‘OK, what do our contracts say, especially on termination?’ It's where the money is, let's be honest.”

“There's any number of word choices that a lot of people using precedents probably haven't thought about until a decision comes out. And then it's worth looking and, if you’re an employment lawyer, parsing every word and going, ‘Gosh, is this going to be problematic?’”

Realistically, doing this kind of review with existing employees is more of an endeavour, says Orth, but if there's a sea change in the law, then it's worthwhile consulting with your legal team to see whether it's something that you need to change or address on a go-forward basis, he says, “or whether it's something that you can even accomplish with respect to your existing employees.”

Takeaway for HR: Avoid fixed-term contracts

Also of note: the risks of using fixed-term contracts. In this case, taking that approach cost the employer a lot of money.

Often with these contracts, employers have misconceptions, according to Orth.

“But… the consequences are grave if you don't get it right, because [the township] owed way more than they ever could have owed if they had gotten it right.”

If this employer had used an indefinite term employment agreement, even if it had owed reasonable notice, “it wouldn't have approached what they owed based on this decision,” he says.

“A short-term employee is not going to get two years’ worth of salary for a reasonable notice, it's not going to happen.”

So it's worth evaluating your practices, if you're an employer who relies on fixed-term contracts or term employees, says Orth.

“In this case, they did try to address it — instead of just saying, ‘This is a fixed term’ and then not worrying about it, they had the additional termination language — but it just didn't cut it.”