For small and mid-sized businesses in Ontario, employment contracts are often drafted at the beginning of a growth phase, and then left untouched for years.

For Toronto SMEs, outdated or poorly drafted contracts are one of the most common sources of avoidable litigation. In many cases, a single unenforceable clause can invalidate an entire termination provision, dramatically increasing wrongful dismissal exposure.

Regular contract review is not simply administrative housekeeping. It is a strategic risk management exercise. Below are seven clauses Ontario employers should revisit to ensure their agreements remain enforceable and aligned with business objectives.

1. The Termination Clause

The termination clause is the most litigated provision in Ontario employment law. Under common law, employees are entitled to reasonable notice, which can far exceed the minimums set out in the Employment Standards Act (ESA). Employers rely on termination clauses to limit notice to ESA minimums. However, if a termination clause contravenes the ESA in any respect, courts may strike it entirely.

Recent Ontario decisions have demonstrated a strict approach to ESA compliance. Even minor drafting errors — including language that could theoretically result in less than minimum entitlements — may render a clause unenforceable.

If the termination clause fails, the employer’s exposure reverts to common law reasonable notice. For SMEs, that difference can be significant. A properly drafted termination clause remains one of the most important tools for controlling liability.

2. Bonus and Incentive Compensation Language

As explored in earlier discussions on termination exposure, bonuses and incentive pay frequently become the subject of dispute. Many employment agreements fail to clearly address what happens to bonus entitlement upon termination. Some agreements rely solely on incentive plan documents, which may not be fully aligned with employment contracts.

Ontario courts assess whether bonuses are integral to compensation and whether contractual language clearly removes entitlement during the notice period. Ambiguity is often interpreted in favour of the employee.

Employers should ensure that bonus, commission, and equity-related language is coordinated across all governing documents and clearly addresses termination scenarios, including termination without cause. Without careful drafting, incentive compensation can substantially increase damages.

3. Overtime Eligibility and Exemption Language

Growing companies frequently transition employees from hourly to salaried roles without revisiting overtime language. Under the ESA, overtime entitlement depends on actual job duties, not job titles. While certain managerial and supervisory roles are exempt, the exemption is narrowly interpreted.

Employment contracts should accurately reflect the nature of the role and clarify overtime expectations where appropriate. However, no contractual language can override ESA minimum standards.

Misalignment between contract language and operational reality creates risk. If an agreement states that an employee is exempt from overtime but their actual duties do not qualify for exemption, liability may arise. Periodic review ensures that evolving roles remain properly classified.

4. Independent Contractor Characterization

Many SMEs rely on independent contractors for flexibility and cost control. However, labelling someone as a contractor in an agreement does not determine their legal status. Courts assess the substance of the relationship, including control, integration, ownership of tools, and economic dependence.

Agreements should reflect genuine independence and avoid language that suggests an employment relationship. At the same time, employers should ensure that operational practices align with contractual intent.

If a contractor is later found to be an employee, exposure may include unpaid overtime, vacation pay, CPP and EI contributions, and wrongful dismissal damages. Regular review of contractor agreements is essential, particularly as working relationships evolve.

5. Restrictive Covenants: Non-Competition and Non-Solicitation Clauses

Restrictive covenants are frequently included in employment agreements but are often unenforceable. The majority of non-competition clauses are prohibited under Ontario employment law, and are available only in exceptional circumstances.

Non-solicitation clauses are more commonly upheld, provided they are reasonable in scope, duration, and geographic reach.

Poorly drafted restrictive covenants may not only fail in court but may also undermine the credibility of other contractual provisions. SMEs should ensure that restrictive covenants are narrowly tailored, supported by legitimate business interests, and consistent with current legal standards.

6. Temporary Layoff Provisions

Many employers assume they have an inherent right to temporarily lay off employees during business downturns. In fact, unless an employment contract provides for temporary layoff in accordance with the ESA, a layoff may constitute constructive dismissal.

The ESA permits temporary layoffs within defined time limits. However, common law does not recognize a general right to lay off employees absent contractual authorization.

For businesses operating in cyclical industries or subject to market fluctuations, including a carefully drafted temporary layoff clause may provide flexibility. Without such a clause, economic restructuring can inadvertently trigger termination liability.

7. Probation and Performance Clauses

Probationary periods are commonly included in employment agreements, but they do not eliminate ESA obligations.

Even during probation, employees are entitled to minimum statutory notice after a certain period of service. Additionally, termination decisions during probation must still comply with human rights legislation.

Employers sometimes assume that probation provides unfettered discretion. In reality, courts may examine whether the employer acted in good faith and provided a fair opportunity to demonstrate suitability. Probation clauses should clearly define expectations and align with statutory requirements.

The Risk of Outdated Agreements

Employment law in Ontario evolves regularly. Clauses that were enforceable five years ago may now be vulnerable. SMEs often rely on templates obtained online or adapted from prior businesses. These templates may not reflect current judicial interpretations or may fail to account for changes in compensation structure.

In addition, growth-stage companies frequently update incentive plans, introduce hybrid work arrangements, or restructure reporting relationships without updating employment agreements accordingly.

Inconsistency between documents increases the likelihood of disputes. Periodic legal review ensures that contracts reflect current law and operational reality.

Coordination Across Documents

One of the most common issues in SME employment documentation is fragmentation.

An employment agreement may address termination but not equity. A bonus plan may address payout timing but not notice entitlement. A shareholders’ agreement may include restrictive covenants that differ from those in employment contracts.

In litigation, inconsistencies are scrutinized carefully. Courts interpret ambiguity against the drafter (typically the employer). Coordinated drafting across employment agreements, incentive plans, contractor agreements, and shareholder documents reduces exposure.

Protecting Growth Through Strong Documentation

Employment agreements are not merely formalities. They are foundational risk management tools. For Ontario SMEs, carefully drafted and periodically reviewed contracts can prevent costly litigation, preserve flexibility during restructuring, and provide clarity during leadership transitions.

As businesses expand, the sophistication of employment documentation should evolve accordingly. Proactive legal review supports growth while minimizing avoidable exposure.

Haynes Law Firm: Providing Innovative Employment Law Support to Ontario SMEs

Before implementing new compensation structures, restructuring roles, or terminating employees, it is prudent to ensure your agreements are enforceable and aligned with your operational needs.

As a Toronto employment lawyer advising Ontario businesses, Paulette Haynes drafts and reviews employment contracts that withstand scrutiny. Haynes Law Firm works proactively with SMEs to reduce termination exposure, protect confidential information, and support sustainable growth.

Schedule a confidential consultation by calling (416) 593-2731 or contacting us online to audit your employment agreements and strengthen your workplace risk management strategy.