Most employment contracts include a section regarding termination. It typically contains clauses that set out the terms of termination, including any severance that may be available. It may set out the circumstances for which an employee may be terminated and how much compensation is available, if any. However, not all termination clauses are enforceable and may not be upheld in court. If the clause is invalid and an employee is terminated, there could be a wrongful dismissal. If this is the case, the employee may be entitled to compensation through common law if the severance provided is insufficient.
This article will discuss the standard features of termination clauses in an employment contract. We will also discuss when a termination clause may not be upheld in court and what may occur due to this finding. In addition, we will address some case examples in which the court addressed the issue of whether a termination clause was valid to demonstrate the consequences of having an invalid termination clause in an employment contract.
What is included in a termination clause?
The termination clauses of an employment contract may set out what will occur depending on whether the employee was terminated for cause or not. If the employee is terminated for cause, they may not be entitled to compensation, but as we will discuss below, this is confined to a narrow set of circumstances. In other words, it is not available to the employer to consider certain circumstances as a “for cause” termination.
The termination clauses will include information on how much compensation is available and may include information on how this will be calculated. For example, the amount may depend on how long the employee has been with the company. Generally, it will include language relating to the legislation, the Ontario Employment Standards Act (“ESA”), to ensure that the employment contract covers minimum standards.
When is a termination clause not permissible?
Issues concerning a termination clause can arise for too broad clauses describing termination “for cause.” The language of the termination clause must be consistent with the standard set out in the ESA. According to section 2(1)(3) of the ESA regulation 288/01, an employee can only be terminated without notice or payment in lieu of notice when employees are found to be “guilty of wilful misconduct, disobedience or wilful neglectful duty that is not trivial and has not been condoned by the employer.” These categories are much narrower than the standard for “just cause” at common law. Some examples include workplace harassment, violence, theft, fraud, or severely neglecting one’s duties. Also, to find that an employee has engaged in wilful misconduct, there must be evidence that the employee was deliberately doing so rather than being careless unless it reached a severe neglect of one’s duties.
Therefore, termination clauses stating that an employee can be terminated without notice or pay in lieu of notice for any just cause would be too broad and will not be upheld by the court.
What happens if a termination clause is unenforceable?
If the court finds that a termination clause is unenforceable, that clause will be struck out. Also, even though only a small portion of one clause is at issue, the court will strike out the other termination provisions so that the entire termination section of related clauses will not be part of the employment contract.
Even if the employer is not invoking the “for cause” termination provision in a particular circumstance, it still may be unenforceable, and the other termination clauses (i.e. terminations without cause) will still be struck out by the court and invalidated. Therefore, it is especially important for employers to carefully consider the language of employment contracts, as one offending clause may also impact other clauses.
Compensation as reasonable notice or pay in lieu of notice
If the entire termination section of an employment contract is struck out, then it will be as if there are no termination clauses at all in the contract. Therefore, the court must rely on the legislative and common law standards to determine whether an employee is entitled to compensation and how much this would be.
Employees are entitled to reasonable notice or pay in lieu of notice. Under the ESA, the amount of reasonable notice or pay in lieu of notice depends on how long they were employed with the employer. The longer they have worked for the employer, the more notice or pay is required.
Beyond the minimum standards set out in the legislation, terminated employees are entitled to reasonable notice or pay in lieu of notice at common law. The length of notice or amount of pay depends on the following factors:
- The employee’s age when they are terminated;
- The character of the employment;
- How long the employee worked for the employer;
- The ability for the employee to find similar employment with a different employer, given their skills, experiences, and qualifications.
Case examples
In Waksdale v Swegon North America Inc, 2020 ONCA 391, the employee worked for just over 9 months. He was terminated without cause and was paid two weeks’ pay in lieu of notice. The parties in this case conceded that the Termination for Cause provision breached the ESA standards. However, the Termination with Notice provision did fulfill the requirements of the ESA. The court found that the employment agreement should be interpreted as a whole rather than piecemeal. Given the power imbalance between employers and employees, the court refused to uphold termination clauses that violate minimum legislative standards, either in whole or in part. Therefore, the court struck out the entire termination section, which included both clauses for without cause and for cause terminations.
In another Ontario Court of Appeal case, Rahman v Cannon Design Architecture Inc, 2022 ONCA 451, the following for cause termination clause was considered too broad and therefore unenforceable:
“[The employer] maintains the right to terminate your employment at any time and without notice or payment in lieu thereof, if you engage in conduct that constitutes just cause for summary dismissal.”
In a recent Ontario case, Tan v Stostac Inc, 2023 ONSC 2121, the court found that the termination clause was invalid as it was too broad and did not align with the narrow categories of a “for cause” termination as set out by the legislation.
The clause at issue was as follows:
“The Employer may end the employment relationship at any time without advanced notice and without pay in lieu of such notice for any just cause recognized at law.” (Emphasis added).
The cases above demonstrate that employers need to be careful about the language of termination provisions, as they may not meet the ESA requirements if they are too broad, which may lead to other termination provisions being struck out as well. This can lead to a costly wrongful dismissal claim by an employee.
Contact Haynes Law Firm in Toronto for Advice on Termination and Wrongful Dismissal Claims
Employers and employees should carefully consider the termination clauses in the employment contract, as there are significant consequences if the clauses do not comply with legislative standards, including a potential wrongful dismissal claim. Our experienced employment law legal team at Haynes Law Firm in Toronto can assist you with issues that arise from termination. For employees, our goal is to ensure that they understand their rights and receive maximum compensation in wrongful dismissal cases. Haynes Law Firm also assists employers in avoiding liabilities arising from terminations not permitted by the legislation. 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.
