Recent Ontario case highlights need to update employment contracts
“There seems to be a major trend that's resulted in a lot of termination provisions being unenforceable – the language is not quite closely monitored and sometimes it results in the whole thing being unenforceable.”
So says Daniel Hassell, an employment lawyer with Zubas Flett Law in Toronto, after the Ontario Superior Court of Justice invalidated a dental office worker’s termination clause because of two provisions that potentially breached employment standards legislation.
“[It’s] blown open tons of employment contracts and made them subject to the common law instead of what was agreed on the face of the agreement.”
Background of decision
The 65-year-old worker was employed as a receptionist at a dental office operated by two oral surgeons in Bolton, Ont. She first joined the office in 1990.
In 2015, both oral surgeons began to plan for their retirement. They reduced their hours and investigated selling the practice. However, oral surgery practices were more difficult to sell than family dentist practices, so they were unsuccessful.
New employment agreements
On May 26, 2015, the surgeons introduced new employment contracts for their staff, who had not previously had written contracts, leading into their expected retirement.
The surgeons offered $500 to all employees who signed the contract. Anyone who declined to sign would receive working notice that their employment on the current terms would end in two years and they would be offered the new contract. If, at that point, they didn’t sign, their employment would be terminated.
The new employment agreement included a provision allowing termination without cause upon the provision of notice or pay in lieu along with any benefits required to be paid equal to the minimums under the Ontario Employment Standards Act, 2000 (ESA).
The agreement also included a conflict-of-interest provision and a confidential information provision. Both stated that breaching that provision would constitute just cause and result in termination without notice or pay in lieu.
Read more: Just cause standard in termination provision breached statutory requirements, says Ontario court
It can be difficult for employers to introduce employment agreements for employees who have been working for a long time without one, but offering consideration or reasonable notice – as the surgeons did here by offering $500 for signing and two years’ notice for those who didn’t – can make it possible, according to Hassell.
“Introducing the contracts midstream or really late into the employment relationship seems possible, but maybe a bit challenging to do without really limiting the termination provisions like the one that they put in place,” he says.
The worker signed the new agreement and continued as a receptionist in the office.
In early 2019, one of the surgeons reduced his office hours to 2.5 days per week and the other announced he would retire on Aug. 26.
On Nov. 1, the remaining surgeon informed staff that he would be retiring in March 2020 and provided written notice of termination effective April 30, 2020.
The worker continued in her position until February 2020, when she went on a preplanned vacation. After she returned, she went on paid sick leave until her termination date. Around this time, the office closed due to a lockdown in response to the COVID-19 pandemic. The office didn’t reopen as dental offices remained closed until June.
After her termination, the worker moved back to her hometown and rented a house there. She started looking for work there and eventually found a job 12 months after her termination and 18 months after her notice of termination.
The worker sued for wrongful dismissal, claiming that the employment contract was unconscionable and the provisions relating to termination without cause, conflict of interest, and confidential information breached the ESA, making it unenforceable. This entitled her to common-law reasonable notice, she argued.
The court first looked at the without-cause termination provision and found no inconsistency with the ESA that could give rise to any ambiguity in the worker receiving termination pay and benefits as required. The provision indicated compliance with the ESA when read in the context of the intent of the parties in the wording of the provision, said the court.
Potential breach of employment standards
However, the court found differently with the other two provisions in question.
The court found that the conflict-of-interest provision was too broad and ambiguous in defining what conduct might cause termination without notice or compensation in lieu. The ESA’s termination regulation stipulates that only wilful misconduct warrants termination without any severance or termination pay, so simply breaching the conflict-of-interest provision didn’t necessarily disentitle a worker from statutory minimums, said the court in finding the provision invalid for potentially breaching the ESA.
The confidential information provision had the same problem. Without any clarification of what constituted wilful misconduct or in what circumstances the disclosure of confidential information could result in termination for cause without notice, this provision also potentially breached the ESA’s standard for providing statutory minimum severance pay, the court said in finding the provision invalid.
Read more: Termination provisions that could hypothetically breach the ESA are unenforceable, according to employment lawyers
The conflict-of-interest and confidential information provisions just had too much ambiguity to enforce termination for a breach, says Hassell.
“Both [provisions] stated the consequence of breaching the clauses, which would be a termination for cause without notice or compensation, and that standard was overly broad as it was the common-law construct of just cause,” he says. “It's broader than the exemptions under the ESA regulations for willful misconduct, and although it's only a potential breach [of the ESA], it's still unenforceable.”
Invalidates entire agreement
Hassell notes that this decision is one of several recently where courts are finding that if just one part of a termination clause is unenforceable, it makes the entire agreement invalid.
“A lot of cases recently have resulted in unenforceable termination provisions, so it seems like a lot of employment contracts need to be updated to address that,” says Hassell.
He adds that it’s often a without-cause termination provision that is fatal to the agreement as less attention may be paid to its wording, and while this case was somewhat unique in that it was conflict-of-interest and confidential information termination clauses that invalidated the agreement, the without-cause termination provision might have spelled trouble for the employer as well.
“It wasn't the most clearly worded without-cause termination clause – it was silent on severance pay and said that the employment relationship can be terminated for any reason, which probably was a potential breach of the reprisal provisions of the ESA,” says Hassell.
The surgeons contended that the worker failed to mitigate her damages as she didn’t apply to any dental offices and didn’t find a new job until 18 months after her termination. However, the court noted that dental offices were closed for the first couple of months after her termination and she moved to a smaller town. In addition, the worker’s relatively advanced age likely limited her opportunities, said the court.
The court found that, normally, taking 18 months to find new employment would not be a reasonable mitigation of damages. However, given the factors at play, it found that her damages in lieu of notice should only be reduced by three months.
Despite how long it took the worker to find new employment, Hassell is surprised that the court made any deduction to the notice period, given the other factors in play.
“It's such a high onus to establish that an employee failed to take reasonable steps [to mitigate], so the fact that [the court] found it was not reasonable was a bit surprising because there wasn't that much evidence [about available employment],” says Hassell. “I would have thought that they would have needed to prove not only that her efforts were unreasonable, but also that if she had made reasonable efforts she would have secured alternative employment in the notice period.”
The surgeons were ordered to pay the worker damages in lieu of 15 months’ notice – her 18-month entitlement minus the three-month deduction for the minor failure to mitigate.
Hassell says that the employer properly handled the retirement planning by addressing the eventuality well in advance and providing adequate consideration for the employment agreements. However, careful wording in the agreement was the problem, he adds.
“Really careful wording in the contract [is essential] – and not just in the termination provisions but also the conflict-of-interest provisions and the confidentiality provisions and any other provision that has anything related to termination in it,” says Hassell. “They all have to be carefully proofread now, knowing that just one flaw in the whole termination provision package will scrap it.”
Employers can help matters by providing termination entitlements that are more favourable than just the ESA minimum which might not be as heavily scrutinized, and communicating with terminated employees about potential job opportunities says Hassell.
“Drafting termination clauses that aren't necessarily just the bare minimum, but reflect some of the seniority of the employee that could be helpful, potentially,” he says. “Not only the employment contracts, but the policies in employee handbooks and anything else that might form part of the contract has to be really closely reviewed, just to make sure that it doesn't go offside of employment standards legislation.”
See Henderson v. Slavkin et al., 2022 ONSC 2964.