Dufault: An interim update for employers

Invalidated termination clauses once again in the spotlight

Dufault: An interim update for employers

Exclusive to Canadian HR Reporter from Rudner Law.

The Ontario Superior Court of Justice made waves in the HR law world with its decision in Dufault v The Corporation of the Township of Ignace, 2024 ONSC 1029.

In brief, the court in Dufault found that the termination clause in the employment agreement was invalid due to it breaching the Employment Standards Act, 2000 (ESA) on a number of grounds. While some of the grounds for invalidating the termination clause were settled law, the court brought forth a new and novel ground which has been the subject of controversy.

Perhaps for the first time, a termination clause was found to be unenforceable because it gave the employer the sole discretion to terminate the employment relationship “at any time,” which is contrary to the ESA. The result is that employment agreements using such language in their termination clauses are vulnerable to challenge; this impacts a great number of existing contracts.

Invalidated termination clauses

Dufault built on a series of cases that invalidated termination clauses for potential breaches of the ESA. The most significant recent case in this series is Waksdale v Swegon North America Inc., 2020 ONCA 391. Waksdale markedly moved the needle towards the employee-friendly side of the jurisprudential meter, and is the law of the land in Ontario. It holds that a termination provision that violates the ESA will make the entire termination clause unenforceable, even if the employer is not relying on the impugned provision.

Subsequent decisions have continued to expand the grounds to include even potential breaches of the ESA. Cases like Henderson v. Slavkin et al., 2022 ONSC, suggest that courts will now look far beyond termination clauses, examining ancillary clauses, and even separate documents, such as incentive plans, for wording that could breach the ESA. Any such wording can invalidate the termination clause, so it is important to take a holistic approach to contract drafting.

Dufault highlights the latter point, as it further expanded the grounds to include wording that could give an employer greater discretion to terminate than what the ESA allows.

Appeal of Dufault decision

Not surprisingly, the employer appealed the decision in Dufault. The appeal included a request that the Court of Appeal convene a panel to review and overturn Waksdale. On June 10, 2024, the court announced that it would not overrule Waksdale in its review of Dufault. Consequently, Waksdale is safe and remains the law.

Since Waksdale is not being revisited in the Dufault appeal, the non-novel grounds for invalidating the termination clause will remain good law. What we don’t know yet is whether the court will address the novel ground for invalidating the termination clause, given that the other grounds were sufficient to render it unenforceable.

While certainty on the matter would be welcome, it is quite possible that the court will not address the issue if it doesn’t have to. This would keep the status quo in place, with Dufault as authoritative but not binding.

HR takeaway on employment agreements

Since employment law can change quickly, it is hard to overstate the value of updating employment agreements regularly. In the current landscape, a good contract from four years ago may not be worth the paper it is printed on today.

We are also in an era in which courts are very pro-employee, and are not opposed to expanding the Waksdale paradigm to catch language that might, even potentially, be a hair away from being offside the ESA. Employers would be prudent to work with savvy HR counsel to navigate this terrain.

In the wake of Dufault, wise counsel advised their clients to revise their employment agreements to remove any extraneous language, no matter how innocuous it may seem. This makes the agreements significantly less vulnerable to challenge.

Proactive counsel understands that whatever becomes of Dufault, the decision demonstrated the risks of unnecessary language, and adapted by eliminating the sources of risk in employment agreements. Consequently, these updated agreements can stand up to the high degree of scrutiny that our courts would subject them to, regardless of Dufault’s ultimate fate.

The bottom line is that working with HR counsel helps employers carry on business with confidence. Employers who receive strategic HR advice from vigilant counsel are well positioned to navigate rapidly changing caselaw, and uncertain situations, such as the novel grounds in Dufault still being up in the air. Indeed, approaching HR counsel as a trusted business advisor, and working with them to achieve your goals, is one the best investments a business can make.

David Gelles is an associate at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].

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