It is important for both employees and employers to consider the employment agreement terms carefully. Some employment contracts may specify terms regarding pay, hours, vacation, leave, termination, and even arbitration. For instance, the employee and employer may agree to pursue arbitration before taking the matter to court. However, in recent cases, the courts have had to decide whether certain arbitration clauses are valid in employment contracts. This is because employment contracts are considered a special form of contract, given the unequal bargaining power between an employer and employee, which is often weighted in favour of the employer, who primarily decides the terms of the contract. 

In this post, we will discuss the role of arbitration clauses in employment contracts, including situations where they may be invalid. For example, we will discuss a recent case, Nohdomi v. Callidus Capital Corporation, 2023 ONSC 4469, in which the court found that the arbitration clause in the employment contract was invalid, as it prevented the employee from accessing lower-cost dispute resolution through the court system rather than arbitration. This post will provide key takeaways for employees and employers to understand their rights and obligations if the employment agreement contains an arbitration clause. 

What is an arbitration clause in an employment contract?

An employment contract may contain an arbitration clause specifying that the employer and employee will pursue arbitration to resolve disputes before court proceedings. In some cases, the clause may specify that it is mandatory to proceed with arbitration first and how the arbitration will be conducted, such as the location and logistics. The clause may even specify which jurisdiction will apply, which may not be local to the employee if they work for a global company. 

However, it is important to note that an arbitration clause could be invalid even if the contract specifies that arbitration is a necessary step in the process. This will depend on the facts of the case, which are discussed in detail below. 

What are the rules surrounding an arbitration for an employment case?

If an arbitration clause in an employment contract is upheld, the Ontario Arbitration Act may apply. Under section 7 of the Arbitration Act, the court can stay (i.e., pause) a court proceeding with respect to a dispute that should have been submitted to arbitration, according to the arbitration clause in an employment contract. However, the court can refuse to pause the court proceeding if the arbitration clause is invalid. 

When would an arbitration clause be invalid in an employment contract?

It is possible that an arbitration clause is invalid and, therefore, not applicable to an employment contract. It is important to understand when an arbitration clause may be invalid, as it can affect the employee’s rights, the employer’s obligations, and the procedure for resolving a dispute. 

An arbitration clause in an employment contract can be invalid if it contracts out of the processes and rights protected in the Employment Standards Act. Generally, employees can make a complaint under the Employment Standards Act if their employer has not been following the minimum standards set out in the ESA. The Ministry of Labour can begin an investigative process concerning a potential breach of an employment standard. The ability to file the complaint itself is also an employment standard, which could be breached if the parties are required to resolve matters through arbitration, according to the employment contract. The employee and employer must participate in the investigative process if a complaint is made. In addition, the employer must participate for the employee’s benefit, which recognizes that the ESA is meant to protect an employee’s minimum standards. 

The arbitration clause can also be invalid if the required costs to participate are too high, which would prevent an employee from engaging in the process. Other accessibility considerations are also important, such as if the arbitration would be held in a different country, especially for global companies. As a result, the employee may never have a real opportunity to address the dispute, and if it were left to the arbitrator, the employee may never be able even to challenge the validity of the arbitration clause.

Additionally, an arbitration clause could be invalidated if it is unconscionable. This means that if the contract is significantly unfair due to unequal bargaining power, it may be invalid. In particular, this is common in employment contracts, where the employer often has more bargaining power to decide the terms of the agreement. This principle is meant to protect vulnerable parties, such as employees. 

To find that a contract term is unconscionable, the court will need to determine that two elements apply:

  1. Inequality of bargaining power between the parties; and
  2. An improvident bargain.

Generally, there is unequal bargaining power in favour of the employer, and unfairness of the provision will depend on the particular terms being disputed in the contract. An improvident bargain results from the inequality of bargaining power and unfairly disadvantages the party with less bargaining power. In the context of an arbitration clause in an employment contract, the clause may be unconscionable if it creates significant barriers to accessing the arbitration process despite being mandatory. 

Recent Ontario Case Finds Invalid Arbitration Clause in Employment Contract 

In a recent case, Nohdomi, the court found that the arbitration clause in an employment contract was invalid. As a result, the employee was to continue their court proceeding, which was not paused so that the parties could attend arbitration. 

In this case, the parties had an employment contract with a clause that required them to resolve a dispute through arbitration before proceeding to court. However, the court decided this clause was invalid because it essentially contracted out of the ESA. If the arbitration clause were followed, the employee would be deprived of their right to have the matter investigated by an Employment Standards Officer. The court also found that it was irrelevant whether the employee had filed a complaint under the ESA because the employee also had the option to begin a civil proceeding instead of going through the complaint process. 

The employer claimed that the arbitration clause should be upheld because they did not provide for a lesser benefit than provided in the ESA. The court disagreed with this, as the employee was required to pay $7,500 to arbitrate the matter, according to the contract, which did not give him a greater benefit than the complaint process, which did not require any costs to start. 

Overall, the arbitration provision was invalid, and the employee was not required to arbitrate the matter before starting a court proceeding against his former employer. 

Contact Haynes Law Firm in Toronto for Advice on Employment Contracts and Mediation & Arbitration Services

Employers and employees should carefully consider the terms of the employment contract, as some clauses, like an arbitration clause, may be invalid. Our experienced employment law legal team at Haynes Law Firm in Toronto can assist you with disputes concerning employment contracts and employment standards. Our goal is to ensure that employees understand their rights and receive maximum compensation. Haynes Law Firm also assists employers in avoiding liabilities that may arise. We are dedicated to finding the best resolution for you.

To book a consultation, please contact us online or by phone at 416-593-2731.