Termination provision done in by ‘what if?’

The termination provision in an Ontario worker’s employment contract has been ruled unenforceable by the Ontario Superior Court of Justice because the provision could potentially deny the worker notice of termination and severance pay in the event of changes to the worker’s job or company growth in the future — despite the fact that the worker’s current job made him exempt from such entitlements.

Chris Rutledge was a construction employee at Canaan Construction, a construction contractor in Guelph, Ont. Upon the commencement of his last continuous period of employment as an apprentice at Canaan, he signed an employment agreement that included the following termination provision:

“The employee may be terminated at any time without cause upon being given the minimum periods of notice as set out in the Employment Standards Act, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation. The employee acknowledges that pursuant to the Employment Standards Act they are not entitled to any notice or time in lieu thereof due to the nature of their job and as such they are entitle [sic] to absolutely no notice or pay and benefits in lieu thereof upon termination.

“The termination provisions set force above, represent all severance pay entitlement, notice of termination or termination in lieu thereof, salary, bonuses, vacation pay and other remuneration and benefits payable or otherwise provided to the Employee in relation to the termination of the Employee regardless of cause or circumstances.”

Two years later, Rutledge was temporarily laid off due to “shortage of work/end of contract or season.” He did not receive a layoff notice or pay in lieu of notice. Two months following his layoff, Rutledge found alternate employment.

Rutledge brought a claim against Canaan in Small Claims Court for damages for wrongful dismissal. Canaan’s defence was that: Rutledge’s employment contract absolved it from any requirement to give notice of the layoff or pay in lieu of notice; and Canaan was not obliged under the Employment Standards Act (ESA) to give Rutledge notice of the layoff or pay in lieu of notice because he was a “construction employee” — a defined term under ESA regulations.

The Small Claims Court decided that the employment contract did not rebut the presumption of reasonable notice. It concluded that the employment contract was void because it purported to contract out of the obligation under the ESA to pay benefits during the statutory notice period, and it awarded Rutledge damages equivalent to 9.5 weeks’ salary.

Superior Court decision

The Ontario Superior Court dismissed Canaan’s appeal of the Small Claims Court’s decision. It began its analysis with a review of the following applicable legal principles and statutory provisions:

• The common law principle of termination of employment on reasonable notice is a presumption. 
• The presumption is only rebuttable if an employment agreement clearly specifies another period of notice.
• The employment agreement is only enforceable if it complies with the minimum employment standards in the ESA. If it does not, the presumption is not rebutted and the employee is entitled to reasonable notice of termination.
• Some types of employees are not protected by the ESA, including “any prescribed individuals.” (s. 3(5), ESA)
• However, if an employee has two or more roles within their employment, and only one is not protected by the ESA, the employee will continue to be protected with respect to that other role. (s. 3(6), ESA)
• Section 2(1)9 of Regulation 288/01 under the ESA states that construction employees “are prescribed for the purposes of s. 55 of the Act as employees who are not entitled to notice of termination or termination pay under Part XV of the Act.”

The court emphasized that, since Rutledge was a construction employee throughout his employment, notice of termination and termination pay did not apply to him, but they were the only employment standards that didn’t.

“The regulation does not flatly disentitle Rutledge to the protection of the entire ESA as is the case for some of the other occupations listed in s. 3(5) of the ESA. Rutledge continues to be afforded the protection of all other employment standards set out in the ESA, unless otherwise specifically excluded by other legislation,” said the court. “Accordingly, if any wording of an employment contract purports to deny Rutledge those other employment standards, then those provisions are unenforceable.”

The court concluded that Rutledge’s employment contract contained the following two errors that rendered the termination provision unenforceable:

• An employee cannot contract out of a protected employment standard under the ESA even if it does not yet apply to them. It is enough if the provision in the contract would potentially violate the ESA at any date after hiring. If Rutledge’s position changed to something other than a construction employee, his employment contract would deny him his right to benefits during his notice period, a right protected by the ESA. Although the employment contract stated that Rutledge was employed as an apprentice in the construction industry, “it does not explicitly state that this applies only to him while occupied as a construction employee and that it would be of no force or effect if his position changed.”
• Construction employees are entitled to the employment standards guaranteed upon their severance (ss. 63-66, ESA). “If Canaan grew in size, employing more than 50 employees and then discontinued its business, or else had a payroll more than $2.5 million, Rutledge would be entitled to severance pay, irrespective of his job description,” said the court. “The employment contract clearly disentitles Rutledge to these employment standards.”

The court concluded that even a potential violation of the ESA should be unenforceable, even if the change of that violation is remote. In this case, the termination provisions in Rutledge’s employment contract “purported to contract out of the ESA in at least two ways,” said the court.

Bottom line for employers

Rutledge v. Canaan reminds employers that they certainly have a threshold to meet when drafting termination provisions in employment agreements. Even if an employment standard does not currently apply to an employee, an employer must consider even a remote possibility of the ESA employment standard potentially applying in the future. Accordingly, when drafting termination clauses in employment agreements, employers should consider current circumstances as well as hypothetical future circumstances. A termination provision that purports to deny an employee rights under employment standards legislation to which they might potentially be entitled in the future will raise issues of enforceability if challenged.

We will have to see if subsequent decisions support the notion that the degree of remoteness of a potential ESA violation does not matter. Regardless, employment contracts should be updated on a regular basis because the law of termination clause compliance is constantly evolving. 

For more information, see:

• Rutledge v. Canaan Construction Inc., 2020 ONSC 4246 (Ont. S.C.J.).

Rhonda B. Levy is knowledge management counsel for Littler LLP in Canada, monitoring legislative, regulatory and case law developments. She can be reached at (647) 256-4545 or [email protected]

George Vassos is a partner with Littler LLP in Toronto, practising on a wide variety of labour and employment law issues. He can be reached at (647) 256-4504 or [email protected]