Arbitration clauses in employment agreements

Typically, if an employee has a dispute with their employer, they have the right to start a court lawsuit against the employer and vice versa. Common examples include wrongful dismissal lawsuits, breach of contract claims, or motions to enforce restrictive covenant agreements. In some cases, however, employers may try and limit the parties' abilities to sue in court by including a mandatory arbitration clause in the employment agreement. These clauses require the parties to proceed by way of arbitration, which is an alternative dispute mechanism where a third party, neutral arbitrator decides the case.

In this blog post we explore some of the most recent court cases considering the enforceability of arbitration clauses and conclude with a few takeaways to keep in mind when dealing with arbitration clauses. We would encourage readers to also check out our follow-up blog post, Is arbitration worth it?, where we discuss the pros and cons of proceeding with arbitration in non-unionized workplaces.

Recent jurisprudence:

Uber Technologies v. Heller, 2020 SCC 16 ("Uber"):

The starting point is the recent Supreme Court of Canada decision in Uber. In this well publicized decision, the Supreme Court of Canada ruled that an arbitration clause included in Uber's standard form services agreement with drivers was not enforceable on the basis it was unconscionable. In reaching this conclusion, the Court emphasized the prohibitive terms of the arbitration clause, including that the arbitration was to occur in the Netherlands and required payment of US $14,500 in up-front administrative fees, as well as the significant gulf in bargaining power between Uber and the drivers who agreed to the clause.

Following the release of the Uber decision, many queried whether it signposted a broader trend of arbitration clauses not being enforced by the courts in the employment context. It appears that might not be the case though.

Leon v. Dealnet Capital Corp., 2021 ONSC 3636 ("Leon"):

In the May 2021 decision of Leon, the Ontario Superior Court of Justice considered whether to stay an employee's lawsuit against their former employer on the basis the employment agreement between the parties included an arbitration clause. The arbitration clause read as follows:

"All disputes arising out of or in connection with this contract, or in respect of any legal relationship associated therewith or derived therefrom, will be referred to mediation and, if unsuccessful, finally resolved by arbitration under the statutes of the Province of Ontario."

Notably, the employment agreement also included a provision that stipulated the agreement was subject to Ontario's minimum employment standards legislation, the Employment Standards Act ("ESA"), and preserved the employee's rights as provided by the ESA.

The trial judge held the lawsuit should be stayed in favour of arbitration. In reaching this conclusion the judge emphasized there were not the issues of unconscionability present in the Uber decision - the employee was a senior executive and the arbitration clause did not require the employee to pursue expensive arbitration in a foreign country. Further, the employment agreement expressly preserved the employee's rights under the ESA, and did not purport to remove the employee's ability to make a complaint to the Ministry of Labour for breach of the ESA. As such, it did not breach the rules against contracting out of the ESA's protections.

It appears that the employee may be appealing this decision: 2021 ONSC 7192.

Irwin v. Protiviti, 2021 ONSC 7596 ("Irwin")

Mere months later, in July 2021, the Ontario Superior Court of Justice again considered the enforceability of an arbitration clause included in an employment agreement in the case of Irwin. The arbitration clause read as follows:

"Any dispute or claim arising out of or relating to Employee's employment, termination of employment or any provision of this Agreement, whether based on contract or tort or otherwise shall be submitted to arbitration pursuant to applicable provincial law having jurisdiction over the dispute or claim. The parties agree that neither punitive damages nor legal fees may be awarded in an arbitration proceeding required by this Agreement…."(emphasis added in decision)

Unlike in Leon, it appears the employment agreement did not include a provision which preserved the employee's rights under the ESA, including the right to file a Ministry of Labour complaint. As a result, the employee argued the arbitration clause was unenforceable as it conflicted with the minimum standards mandated by the ESA as well as human rights legislation. She also argued it was unconscionable.

Relying on previous jurisprudence, the trial judge declined to rule on the enforceability of the arbitration clause. The trial judge held that the question of the enforceability of the arbitration clause must itself be resolved by way of arbitration. This decision was upheld on appeal to the Ontario Court of Appeal: 2022 ONCA 533.

Practically, this means the employee will need to go through arbitration to determine if the clause is or is not enforceable. Only if it is found to be not enforceable will she be able to pursue a lawsuit against her employer.

Takeaways:

These recent decisions highlight some of the challenges associated with arbitration clauses in the employment context. In order to be enforceable, the arbitration clause must not be unconscionable and must comply with the requirements of the ESA. However, it is not always obvious whether or not a clause will be enforceable. As a result, there is a risk employers and employees will incur additional time and cost taking legal action simply to resolve the issue of enforceability.

With the above in mind, we would suggest employers and employees alike tread carefully when dealing with arbitration clauses. Employers are encouraged to discuss with legal counsel whether an arbitration clause is appropriate for their agreements and seek assistance with drafting. On the flipside, employees should never agree to a mandatory arbitration clause without first taking the time to fully understand the implications. Lee Workplace Law would be happy to answer any questions you might have.