Some employment agreements attempt to force employees and employers to resolve disputes through arbitration rather than permit them to approach the courts for a resolution. These types of agreements may, for example, purport to prevent an employee from bringing a wrongful dismissal action in the courts. 

This article looks at whether arbitration clauses in agreements are enforceable, along with a recent decision of the Ontario Superior Court of Justice in which an employer sought to prevent an employee from bringing a wrongful dismissal action, arguing that the employee was required by contract to undergo mandatory arbitration. 

What is arbitration?

Arbitration is a less formal and more private dispute resolution process than litigation. However, it is procedurally similar to a trial in many ways; for example, arbitrators act as a trier of fact like a judge and hear evidence and arguments before giving a binding decision. 

Sometimes, arbitration may be preferable for the parties as it is more private and may be quicker than relying on backlogged court schedules. 

Are mandatory arbitration clauses in employment agreements enforceable?

Not necessarily. Courts will not always presume arbitration clauses in employment agreements are enforceable. Employers considering including mandatory arbitration as a term of their contracts should seek legal advice from an experienced employment lawyer to determine whether such clauses are appropriate and enforceable in court.

For example, courts have held that mandatory arbitration clauses that contract out of an employment standard under the Employment Standards Act 2000 may be unenforceable. Mandatory arbitration clauses may be unenforceable in other circumstances as well. 

“Independent contractor” brings wrongful dismissal action 

In Goberdhan v Knights of Columbus, the plaintiff was a “field agent” appointed by the defendant to sell insurance. The defendant is a Catholic fraternal society “dedicated to promoting and conducting educational, charitable, religious and social welfare works”.

The plaintiff’s original contract dated 2011 described him as an independent contractor. It required him to devote his full time to the services required under the agreement. He was paid by commission and compensated for expenses and could only sell the defendant’s insurance to the defendant’s members.

After eight years of working as a field agent, the plaintiff was terminated. The plaintiff filed a statement of claim for wrongful dismissal.

Defendant argued action could not proceed due to the mandatory arbitration clause

The defendant brought a motion to stay the action, arguing that the plaintiff was required by contract to undergo mandatory arbitration.

The plaintiff signed a second contract in 2018. It revised the plaintiff’s specified territory for selling insurance and added a mandatory arbitration clause. It said that non-binding mediation was to be paid by the defendant unless the claim was frivolous. If mediation failed, binding arbitration was required. The contract also limited his severance and termination pay to one week for each year employed, up to a maximum of eight weeks. A third contract dated 2019 was substantially the same for relevant purposes.

Court finds the plaintiff was an employee, not an independent contractor

Justice Harris found that the plaintiff was an employee of the defendant, despite the fact the contracts labelled him an independent contractor.

His Honour found that all factors led to this conclusion, including:

  • the plaintiff could only work for the defendant;
  • the plaintiff was subject to the control of the defendant in terms of the product sold and how it was sold;
  • the plaintiff was required upon termination to return all of the defendant’s property, so he had no interest in the tools relating to his service;
  • the plaintiff was paid by commission and had no expectation of profit or risk of loss; and
  • the activity of the plaintiff was solely for the benefit of the defendant.

There was no consideration for the second and third contracts

Justice Harris explained that a valid contract requires consideration. In exchange for contractual commitments, a contract must provide something of value to which the parties are not already entitled.

In the context of an amended employment agreement, his Honour said that consideration protects employees from unfair employment practices:

“Some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment, but once they have been hired and are dependent on the remuneration of the new job, they become more vulnerable. The law recognizes this vulnerability.”

The later contracts removed the employee’s right to sue, which was “clearly not a benefit to the plaintiff.” Justice Harris decided that the new contracts diminished the plaintiff’s contractual rights while giving him nothing in return. Therefore, there was no consideration for these contracts.

Arbitration agreement invalid, court proceedings can continue

Under the Arbitration Act 1991, the court is required to stay the proceeding if a party to an arbitration agreement commences court proceedings in respect of a matter to be submitted to arbitration under the agreement. However, the court may refuse to stay proceedings in a number of circumstances, including where the arbitration agreement is invalid.

Justice Harris held that, as the new contracts fail for lack of consideration, so too do the arbitration clauses in the contracts. The arbitration agreement was therefore invalid under the Arbitration Act. His Honour decided that the plaintiff’s wrongful dismissal action would not be stayed and should continue.

Contact Haynes Law Firm in Toronto for Guidance on Employee Termination and Employment Contracts

Haynes Law Firm helps employers and employees throughout Ontario achieve effective solutions to legal issues and conflict management in employment law and civil litigation. We ensure our employee clients leave nothing on the table when negotiating the terms of their dismissal so they have the resources they need while they seek new employment. We also help employers manage employee terminations to limit their exposure to legal claims. We carefully draft employment contracts and advise on mandatory arbitration clauses. Please contact us online or call us at 416-593-2731.