One of the most essential terms of an employment contract is the termination clause. It outlines how an employer will address compensation if an employee is terminated. While employment contracts offer some flexibility in their content, employers must ensure that the employment terms do not contradict employment standards set out in Ontario legislation. In particular, employers should pay attention to how the termination clauses in their employment contracts are drafted, as the court may invalidate them if they conflict with the purpose of employment standards legislation. Generally, it is not permitted to contract out of employment standards set out by law.

In this post, we will discuss what will be considered an invalid termination clause in an employment contract. We will also discuss some of the consequences that can occur if a termination clause is found to be invalid. In some cases, the court may strike out the entire termination clause, and the employer may need to pay more damages to the employee than they anticipated. We will also review a case example, Lamontagne v. J.L. Richards & Associates Ltd., 2021 ONSC 8049, in which an employer was liable for $40,000 in damages to an employee due to an invalid termination clause. 

This post will provide key takeaways for employers seeking to draft enforceable employment contracts and employees seeking to understand their rights under employment contracts and employment laws.

What will be considered an invalid termination clause in an employment contract?

Most, if not all, employment contracts will contain a termination clause that sets out what will occur if an employee is terminated. It can also set out situations where an employee may be terminated without notice or pay in lieu of notice. However, it is important to ensure that these terms do not go against standards set out in the legislation. 

According to sections 54 and 61 of the Ontario Employment Standards Act, employers must provide notice or pay in lieu if they choose to terminate an employee, with some exceptions. 

If a termination clause attempts to contract out of the standards set by legislation, the entire termination clause may be unenforceable. Parties can agree to a notice period different from the minimum standards. However, this would only be enforceable if it complies with the minimum employment standards under the legislation and the wording is clear enough so that an employee understands their entitlement at the beginning and end of their employment. Otherwise, the employee would be entitled to reasonable notice upon termination. This means that employees can agree with their employer to receive a notice period longer than the minimum standards, but not less. 

The court will look at the particular wording of the terms at issue in the employment contract, the minimum standards legislation, and other existing case law. The courts have recognized that employment is a significant part of a person’s life, and upon termination, they are vulnerable and need to have their rights protected.

Generally, the court will interpret a termination clause to benefit the employee, given their relative vulnerability in the employment relationship. 

If the termination clause includes a term that the employee can be terminated for cause without notice, then it may be interpreted to mean that the employee was intended to be terminated for just cause. However, the “just cause” standard is lower than what is set out under the Employment Standards Act. Under the ESA, a “for cause” termination requires that the employee engaged in willful misconduct. Therefore, a “for cause” termination provision must be carefully drafted to meet the standard under the ESA, or it can be seen as an attempt to contract out of the minimum standards set by legislation, which is not permitted.

Terms may also exist for “without cause” terminations. Depending on the wording, these can also be seen as an attempt to contract out of the minimum standards. As discussed in the Lamontagne case below, if an employer states that an employee is only entitled to minimum standards of notice or pay in lieu, this may not cover the employee’s benefits and bonuses during the notice period and may go against the legislation.

What are the consequences of an invalid termination clause?

If one or more terms of a termination clause are invalidated, the entire clause may be unenforceable. As a result, the employee may be entitled to compensation for pay in lieu of notice at common law. The amount may be significant, depending on how long the employee worked for the employer, the nature of their role, etc. 

Invalid termination clauses in employment contracts can be costly for employers 

In the Lamontagne case, the court ordered that the employer pay the employee $40,000 as compensation for their termination. One of the issues was the termination clause. The court found that the “for cause” termination terms did not meet the minimum standards of the legislation. The term stated that employment could be “terminated for cause at any time, without notice,” meaning an employee could be terminated for just cause. The just cause standard is lower than the standard of willful misconduct in the ESA, so this was not permitted.

The “without cause” term was also found to be invalid. In this case, the employee was entitled to certain benefits and bonuses. However, the termination clause contained terms stating that the employee would not receive anything else beyond the minimum standards of notice or pay in lieu under the ESA. This term suggested that the employee would not be paid for the benefits and bonuses she was entitled to, so it contravened the minimum legislative standards.

Ultimately, the court found that the termination clause was not enforceable, and the entire section was struck out, rather than just the problematic portions. Therefore, the employee was entitled to reasonable notice or pay in lieu at common law. 

Key takeaways 

Employers must carefully consider the wording of their employment contracts, especially the termination clauses. If they are found to contravene the minimum standards as set out by legislation, the clauses may be struck out, and the employee could be entitled to reasonable notice or pay in lieu of notice, which can be very costly. 

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 get in touch with us online or by phone at 416-593-2731.