Category: Dispute Resolution

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Dispute Resolution Employment Contracts & Policies Mediation & Arbitration

Are Arbitration Clauses Valid in Employment Contracts?

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.

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Dispute Resolution

When Will The Court Decline To Rule On The Validity Of A Mandatory Arbitration Clause?

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, prevent an employee from bringing a wrongful dismissal action in the courts. 

We recently reported on the Ontario Superior Court of Justice’s decision that a mandatory arbitration clause was unenforceable because the employment contract was invalid for lack of consideration.

While the court was prepared to decide on the validity of the clause, this won’t always be the case. Sometimes, the courts decide that the validity of the mandatory arbitration clause is a question that needs to be determined in the arbitration itself. This article looks at two court cases that reached different outcomes on this issue.

The provisions of the Arbitration Act

Under section 7 of the Arbitration Act 1991 (the Act), if a party to an arbitration agreement commences a court proceeding in respect of a matter to be submitted to arbitration under the agreement, the court shall, on the motion of another party to the arbitration agreement, stay the proceeding.

The court can refuse to stay the proceeding in some specified circumstances, such as where the arbitration agreement is invalid. 

According to section 17 of the Act, the tribunal in arbitration may rule on its jurisdiction to conduct the arbitration. It may, in that connection, rule on objections with respect to the existence or validity of the arbitration agreement.

These provisions raise the question of when it is appropriate for the court to determine the validity of a mandatory arbitration clause and when it should be left to the arbitrator to decide.

Court of Appeal strikes down an Uber mandatory arbitration clause

The first case is when the court is prepared to find a mandatory arbitration clause invalid.

In Heller v Uber Technologies Inc., the plaintiff brought a proposed class action seeking a declaration that the class members were employees of Uber. Uber sought to rely on a mandatory arbitration clause contained in the Uber food delivery service agreement. The clause required any disputes to be submitted to mandatory arbitration in the Netherlands. The process was subject to an administrative fee of US$14,500, not including legal and travel expenses.

The Court of Appeal held that this clause was invalid and declined to stay in the court proceedings. Section 96 of the Employment Standards Act 2000 (ESA) allows a person alleging that the ESA is being contravened to file a complaint with the Ministry of Labour. The Court decided that this was an employment standard that could not be contracted out of, under section 5 of the ESA. The mandatory arbitration clause was invalid for preventing the filing of such a complaint.

The Court also found the mandatory arbitration clause invalid on the basis of unconscionability at common law.

Supreme Court agrees, finding the mandatory arbitration clause unconscionable

In Uber Technologies Inc. v Heller, the Supreme Court of Canada upheld the Court of Appeal’s decision, finding the arbitration clause unconscionable. The majority did not deal with the arguments based on contracting out of the ESA.

The Supreme Court explained that:

Where pure questions of law are in dispute, the court is free to resolve the issue of jurisdiction. Where questions of fact alone are in dispute, the court must “normally” refer the case to arbitration. Where questions of mixed fact and law are in dispute, the court must refer the case to arbitration unless the relevant factual questions require “only superficial consideration of the documentary evidence in the record”.

It decided to assess the validity of the arbitration clause because there was a real prospect that the plaintiff’s challenge may never be resolved at arbitration due to the fees involved. The Supreme Court held that the clause was unconscionable because there was an inequality of bargaining power between Uber and the plaintiff, and the terms were unfair, with the court noting things like the huge up-front fee.

Court of Appeal decides that validity of mandatory arbitration clause to be determined in arbitration

The second case is an example of when the court stayed the court proceedings, deciding that the validity of the mandatory arbitration clause was a matter for the arbitration itself.

In the recent decision of the Court of Appeal for Ontario in Irwin v Protiviti, an employee sued for constructive dismissal. Her employer applied to stay the proceedings, relying on a mandatory arbitration clause which said that awards of costs and punitive damages would not be available in arbitration. The employee argued the clause was unconscionable and inconsistent with the ESA.

The Court decided to stay the proceedings, leaving the issue of the validity of the mandatory arbitration clause to be decided in the arbitration. It found that the determination of unconscionability in the case would involve a “probing factual inquiry” and that the question of the clause’s consistency with the ESA was one of mixed fact and law and could not be decided in the abstract. 

As a result, these matters would need to be determined at arbitration after considering the evidence. The Court noted that the case was different from Uber because “none of the access to justice concerns” were present – the employee earned a base salary of $350,000 and had the assistance of legal counsel during the negotiation of her employment agreement. 

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.

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Dispute Resolution

Can You Be Required To Submit Disputes To Mandatory Arbitration?

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.

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Dispute Resolution

“Different Tales Of Competing Reality” In Employment Litigation

Often in employment litigation, disputes are very fact-specific with the employee and employer viewing the situation in completely different ways. For example, an employee may claim that they have been wrongfully or constructively dismissed, while the employer might counter that the employee voluntarily left their employment or that it was entitled to terminate the employee for cause.

As a result, if you are an employer or employee with an employment law issue, it is important to have a strong advocate on your side that will work to deescalate and prevent disputes, while simultaneously preparing for trial. 

This article takes a look at the recent decision of the Ontario Superior Court of Justice in Tuinhof v Modern Heating Brandford Ltd., in which the judge described the parties as presenting “two very different tales of competing reality”. While the employee claimed that he was a loyal employee that had been constructively dismissed, the employer said that the employee conducted unauthorized side jobs and that he voluntarily left his employment. 

Employee takes leave and does not return to work

The plaintiff employee worked for a small company that operated in Brantford installing, servicing and maintaining heating, ventilation and air conditioning units. He started working for the company as an installer and service technician in 2000.

In March 2019, the plaintiff’s wife sent a text message to the directors of the company indicating that the employee was facing health challenges. He had injured his wrist punching a solid oak cabinet and went off work sick, never returning. He went on EI benefits.

In July, the directors met with the employee twice. They wanted a return-to-work plan and asked him to return the keys to the work van that he had and the cell phone the company provided. They expressed dissatisfaction that the employee was doing unauthorized side jobs but told him that he was not fired.

A few days later, the plaintiff contacted a lawyer who issued a demand letter to the company.

Employee sues for damages for constructive dismissal and breach of the Human Rights Code

The employee claimed that he had been constructively dismissed because taking away the vehicle and phone breached an essential term of the employment contract. In order to establish constructive dismissal, the plaintiff must show that (i) the employer has, by a single unilateral act, breached an essential term of the contract of employment; or (ii) there were a series of acts that, taken together, show that the employer no longer intended to be bound by the contract.

The employee also argued that the employer had discriminated against him on the basis of disability, contrary to the Human Rights Code, and failed to accommodate his disability to the point of undue hardship.

The employer countered that it did not terminate the employee and that he simply voluntarily left his employment and chose not to return. It said that the employee never disclosed what accommodation he might require to return to work. In the alternative, it said that if it was determined that it terminated the plaintiff’s employment, such termination was for cause.

Court finds the plaintiff was not constructively dismissed 

Justice Gibson first examined whether the plaintiff had been constructively dismissed by a single, unilateral act. His Honour decided that taking back the vehicle and phone did not breach an essential term of the employment contract. This was because employees of the company did not have a right to a company phone or service truck for private purposes as a condition of employment. The phone and vehicle were to complete work tasks and were not perks.

Secondly, his Honour considered whether there were a series of acts that showed that the employer no longer intended to be bound by the contract. Given that the employee was told he was not fired and that he later even told his doctor he had not been fired, there was no intention of the employer to not be bound by the contract. As a result, he was not constructively dismissed and voluntarily left his employment.

There were grounds to dismiss the employee for cause

In any event, Justice Gibson was satisfied that the employer would have had just cause to dismiss the employee.

His Honour found that he had breached his employee’s duty of loyalty by soliciting business from his employer’s customers for his own benefit. He exposed the company to significant potential liability by affixing gas installation tags that indicated the company as the contractor, meaning the company could have been liable for damages from a faulty installation. The employee had not established that the company had condoned his practice of completing side jobs. 

His Honour decided that his misconduct was sufficiently serious that it resulted in a breakdown of the employment relationship, and dismissal would have been a proportionate step.

The employer did not discriminate on the basis of disability

Finally, Justice Gibson decided that the employer did not discriminate against the employee on the basis of a disability. There was no evidence presented of discriminatory actions by the employer. Furthermore, the employee did not participate in the process of accommodation by providing some medical documentation about his problems and any necessary accommodations.

Justice Gibson dismissed the employee’s action.

Contact Haynes Law Firm in Toronto for Highly Skilled Employment Litigation Representation 

Whether in the courtroom or in the boardroom, Haynes Law Firm in Toronto provides confident and adept advocacy, representing clients on either side of the employment line. The firm’s founder, Paulette Haynes, is highly regarded as an elite litigator and has earned a reputation for delivering remarkable results. Paulette is exceptionally knowledgeable, tactically astute, and inspires confidence in her clients. At Haynes Law Firm, Paulette has built a team that echoes her intense resolve and unrelenting determination to achieve successful results for every client, in every case.

To discuss how the employment law team at Haynes Law Firm can assist you in your litigation matter, please reach out online or call us at 416.593.2731.