Just cause standard breaches statutory requirement, wipes out termination provision

'Ensuring that the contract is valid and fully enforceable is a particularly challenging endeavour'

Just cause standard breaches statutory requirement, wipes out termination provision

One wrong word can scuttle an entire termination provision – it’s something the Ontario Court of Appeal determined in 2020 and has been subsequently reinforced, including in a recent Ontario Superior Court of Justice ruling that awarded the balance of a fixed-term contract to a worker who was fired one year into his three-year employment agreement.

“Generally, in employment contracts, there's usually a termination-for-cause provision and a termination-without-cause [provision],” says Paulette Haynes, an employment lawyer at Haynes Law firm in Toronto. “One of the common threads I've noticed in these cases is the termination-for-cause provision seems to be particularly problematic.”

The worker in this case was a professional engineer who was part owner of The Municipal Infrastructure Group Limited (TMIG), an engineering consulting firm in the Toronto area.

In December 2019, the worker and the other owners sold their interests in TMIG to T.Y. Lin International Canada, a large international engineering firm. As part of the share sale, the worker negotiated an employment agreement allowing him to stay on as a vice-president. The agreement was for a fixed term of three years.

During the negotiation of the agreement, the worker consulted legal counsel and was involved in the drafting and execution of the final agreement.

For-cause termination provision

The agreement contained a termination clause that allowed TMIG to terminate the worker’s employment for cause – which it defined as: “the repeated and demonstrated failure on employee’s part to perform the material duties of his/her position in a competent manner”; theft; dishonesty or falsification of records; wilful refusal to take reasonable directions; or “any act or omission that would amount to cause in common law.” In the event of a for-cause termination, the worker would not receive “payment of any kind” except outstanding salary and vacation pay.

The agreement also allowed TMIG to terminate the worker’s employment without cause by providing notice or pay in lieu pursuant to the Ontario Employment Standards Act, 2000 (ESA).

On Nov. 25, 2020, TMIG terminated the worker’s employment without cause, effective Dec. 31. The worker sued for breach of contract and wrongful dismissal.

TMIG argued that the agreement followed the ESA and the worker himself helped co-author the agreement with the assistance of legal counsel, so he was aware of what he was agreeing to.

The court noted that the ESA requires minimum termination and severance pay for terminated employees except for those who were “guilty of wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned by the employer.” This standard was higher than the common law standard of just cause – examples of which were provided in the employment agreement and created a different standard of behaviour than set out in the ESA, said the court.

The court also noted that it was possible to terminate the worker for just cause under the employment agreement, but minimum statutory notice was required if the ESA standard for wilful misconduct wasn’t met.

Read more: An Ontario worker’s conduct provided just cause but didn’t constitute wilful misconduct that disqualified him from statutory termination pay.

Different standards

“[The termination clause] talked about what ‘cause’ means and it identified some examples, and it included the ESA standard for cause,” says Haynes. “And the court said those are two different standards and, further to that, the common law standard of cause is lower than the ESA standard of cause – and we know that you cannot contract out of ESA rights and obligations.”

That difference in common-law just cause and the statutory standard is a significant one that must be covered in termination clauses or else they will be in breach of the ESA, adds Haynes.

“The ESA [and its regulation] provides that, basically, notice of termination or termination pay has to be given for all terminations, even for those for just cause, with the exception of what they call prescribed employees under the act,” she says. “But what does wilful mean in the context of the ESA? It includes where an employee intended the resulting consequence or acted recklessly, and they knew or ought to have known the effects of their conduct.”

“With that said, poor work conduct that may be accidental or unintentional is generally not considered wilful [under the ESA],” Haynes adds.

As for TMIG’s argument that the worker was sophisticated and participated in the negotiation of the agreement, the court found that, while such points may apply in other contract disputes, they didn’t mean much in an employment contract. Given the inherent power imbalance in the employment relationship, “subjective considerations” should not override “the plain wording” of the agreement, said the court.

Provision breached ESA

The court found that the provision for just-cause termination conflicted with the ESA because it provided a lower standard for termination by excluding any kind of termination or severance pay for common law just cause rather than the higher ESA standard of wilful misconduct or neglect of duty. It also didn’t matter that TMIG didn’t invoke the just-cause provision when it dismissed the worker without cause, as the mere presence of the offending provision made the entire termination clause unenforceable – as set out by the Ontario Court of Appeal in the 2020 decision of Waksdale v. Swegon North America Inc, 2020 ONCA 391 – the court said.

“We now know from Waksdale – and this was reiterated again in [Rhaman v. Cannon Design Architecture Inc., 2022 ONCA 451] – if we have a termination provision that violates the ESA, then it follows that all the termination provisions are void and unenforceable,” says Haynes. “So, to my mind, this case is just reiterating the principles that we see laid out in Waksdale, and it comes back here to roost.”

Since the termination clause was unenforceable and the worker had a fixed-term contract, the court determined that TMIG should pay the worker for the two years that were left on his contract. TMIG argued that this was an inappropriate “windfall” for the worker when combined with what he had been paid under the share sale transaction, but the court found that the employment agreement and the share sale agreement were separate transactions that should not affect each other.

The court added that the worker had no obligation to mitigate his damages because he was terminated from a fixed-term contract, as had been determined in previous decisions.

Read more: Employers don’t automatically have the option to terminate fixed-term contracts early with reasonable notice, says an employment lawyer.

Extra liability for fixed-term contract

The fact that the worker was on a fixed-term contract added a couple of wrinkles in the worker’s favour, says Haynes.

“With an early termination of a fixed-term employee, where now the early termination provisions are considered unenforceable, what the employer is now liable for is not the common law notice period, but basically the wages and any employee benefits that there may be for the balance of the unexpired term from the date of the employee's termination,” she says. “I think, sometimes, in dealing with a fixed-term contract situation, we might think, ‘OK, we’re terminating early without cause and we don't need to give notice of termination or termination pay.’ That's not what the ESA says.”

Haynes also says that the court’s statement that the worker had no duty to mitigate because of the fixed-term contract was somewhat surprising.

“Generally speaking, as employment counsel, we tend to expect that there's a duty of mitigation, regardless of whether the employee’s hired on a fixed-term or indefinite basis,” says Haynes. “This whopping set of damages and the principle about paying out the balance of a fixed-term contract shouldn't come as such a surprise – but I think it was a little bit of an eye-opener about the fact that the fixed-term contract employee doesn't have to mitigate their damages.”

The court’s decision is a reminder to employers that there isn’t much leeway if a termination provision isn’t carefully worded, she says.

“This case reminds us, yet again, that ensuring that the contract is valid and fully enforceable is a particularly challenging endeavour,” says Haynes. “We have to pay very careful attention to the ESA and what it says about termination, and in particular termination with cause.”

Employers should also carefully consider whether it makes sense to hire someone on a fixed-term contract as opposed to an indefinite term, she says.

“I'm not saying don’t do one or the other, but it should be very compelling and not be just because you want to avoid ESA obligations – because as we've seen from these cases, that's not going to work.”

See Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 4522.

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