Just-cause standard, sole discretion provisions contravened statutory requirements
An Ontario municipality must pay a worker more than $150,000 after firing her two months into a two-year fixed-term contract without an enforceable termination provision, an Ontario court has ruled.
“There's almost no legitimate reason why an employer would use a fixed-term contract,” says Barry Fisher of Barry Fisher Arbitration and Mediation in Toronto. “It's not hard to make an enforceable contract, but again and again employers try to limit it [too much].”
The worker was hired in October 2021 by the Corporation of the Township of Ignace near Kenora, Ont. Three months later, she was assigned to the position of youth engagement co-ordinator.
On Nov. 24, 2022, the worker and the township signed a fixed-term employment agreement stating that her employment would end on Dec. 31, 2024. The agreement included termination clauses, one referring to without-cause termination and another to termination for cause.
For-cause termination provision
The for-cause termination provision stated that the township could terminate the worker’s employment “at any time and without notice or pay in lieu of notice for cause” with “no further payments of any nature” required. It stated that cause “shall include but is not limited to” the failure to perform services without written approval and “acts of wilful negligence or disobedience” that caused injury or damage to the township.
The without-cause termination provision stipulated that the township could end the worker’s employment “at its sole discretion… at any time” by providing written notice and the worker’s “base salary for a period of two weeks per full year of service to a maximum payment of four months or the period required by the Employment Standards Act, 2000 [ESA] whichever is greater.”
Payment in lieu of notice was to be paid either in bi-weekly instalments or in a lump sum, at the township’s discretion. Employment benefits would be paid during the period when the worker’s salary continued to be paid, while long-term and short-term disability benefits would be paid during the period required by the ESA.
Termination without cause
However, just two months after signing the new agreement, the township terminated the worker’s employment without cause on Jan. 26, 2023. The township paid her two weeks’ termination pay and continued her benefits for two weeks.
The worker sued for wrongful dismissal, alleging that the termination clause in her agreement was illegal and unenforceable. She argued that the for-cause termination provision violated the ESA by allowing the township to withhold termination and severance pay for the common law standard of just cause instead of the statutory standard of willful misconduct.
The without-cause provision also violated the ESA by only referring to “base salary” for pay in lieu of notice and not including other forms of payment that form part of regular wages under the ESA, said the worker.
In addition, the worker contended that the termination provisions allowed the township to terminate the worker’s employment “at any time” at its “sole discretion,” when the ESA prohibits employers from doing so in certain circumstances.
The township argued that the contract clearly incorporated the ESA when read in its entirety and it had paid her the proper entitlements under the act. It pointed out that the for-cause provision limited why employment could be terminated to wilful misconduct, wilful negligence, or disobedience, which was a minimum standard in line with the ESA standard.
The Ontario Superior Court of Justice noted that employment contracts are generally interpreted in favour of employees, as they have less bargaining power and usually less knowledge of their rights. In addition, the ESA is “remedial legislation” and should be interpreted in a manner that encourages employers to comply with minimum requirements, the court said, adding that termination clauses that try to exempt employers from common law reasonable notice should have clear wording.
The court also noted that it had been established in case law that subsequent compliance with an employment standard does not allow an employer to contract out of it in the first place, so the employment contract must be compliant at the time it is entered into.
Just cause standard a breach of statutory requirements
The court agreed with the worker that the for-cause provision contravened the ESA. The fact that the provision referred to termination for cause when the ESA did not was a breach of statutory requirements. Although the provision outlined certain forms of conduct that were similar to the ESA’s bar for disentitlement to termination and severance pay, it also said that justification of termination for cause was “not limited to” those examples, leaving the door open for the township to deny statutory termination and severance pay, said the court, adding that “failure to perform services” was not the same as wilful misconduct.
The court also found that the without-cause termination provision breached the ESA, agreeing with the worker’s argument that providing for only the payment of base salary for the notice period did not follow the ESA’s definition of regular wages. The provision made no mention of vacation pay or sick days – which were mentioned elsewhere in the agreement, said the court.
In addition, the granting of “sole discretion” for the township to terminate the worker’s employment at any time didn’t follow the ESA, which prohibits terminating an employee at the end of a statutory leave or in reprisal for exercising a right under the ESA. This means that the right of the employer to terminate is not absolute, the court said.
“The ESA says you can't fire someone for human rights-related reasons, or for union-positive things, for example,” says Fisher. “The Occupational Health and Safety Act and other statutes have an anti-reprisal section, and this provision purported to ignore that.”
The court also pointed out that the ESA requires an employer to pay a lump sum equal to the amount that would be paid during working notice. However, the termination provision granted the township the option to provide pay in lieu of notice in bi-weekly instalments – another contravention, the court said.
“My understanding is this is the first decision that deals with the lump-sum argument and the sole discretion at any time argument,” says Fisher. “You can make somebody work out the notice period, in which case you don't have to pay them a lump sum, but most employers don't want to do that - termination pay and severance pay always has to be paid as a lump sum.”
Termination provisions unenforceable
The court determined that the termination provisions were unenforceable.
As for the worker’s actual entitlement, the court noted that the worker was on a fixed-term employment agreement. Since there was no valid termination provision, the worker was entitled to payment for the balance of the contract end date on Dec. 31, 2024.
The township was ordered to pay the worker 101 weeks’ salary and benefits less the two weeks already paid, for a total damage award of $157,071.57.
Although higher standards for termination provisions are starting to come up in other provinces, Ontario’s are high due to a more complicated ESA that has that statutory standard of wilful misconduct to deny termination and severance pay, along with the 2020 Ontario Court of Appeal decision Waksdale v. Swegon North America Inc., 2020 ONCA 391, that established termination provisions that didn’t use that wilful misconduct standard made an entire agreement unenforceable, says Fisher.
“The Waksdale decision was earth-shattering when it came out in 2020,” he says. “I don't think I've ever seen a compliant contract drafted after 2020.”
Review employment agreements often
That decision was an example of how much the law can change significantly, so employers and their counsel who use templates for their employment agreements need to review them often, says Fisher.
“This decision alone will probably invalidate thousands of employment contracts across the country, so how's the average businessperson or HR person supposed to keep track of that?” he says. “Maybe the answer is, once a year we sit down and we review our employment agreements, but then what do you do with existing employees - you have to give them valid consideration to [change] the contract.”
One solution that could make things easier in maintaining enforceable employment agreements is not to be a stickler in limiting entitlements to just statutory minimums and give themselves some breathing room, says Fisher.
“Employers can still limit things from common law entitlements, but they can be a little more generous,” he says. “When I drafted contracts 25 years ago, I refused to do ESA-minimum contracts and said, ‘You’ve got to give a little bit more.’
See Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029.
