Another One Bites the Dust - Void Termination Provisions in Employment Contract

**Written by Zura Nakiwoga, Articling Student at Lee Workplace Law

Introduction:

The Ontario Superior Court of Justice recently delivered a significant decision in Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029. This decision re-enforces the challenges of enforcing termination provisions in employment contracts. The court's analysis offers valuable insights for both employers and employees navigating the complexities of contractual agreements in the province.


Case Overview:

The case revolved around a fixed-term employment contract between an employee and the Corporation of the Township of Ignace. The contract included termination clauses that allowed the employer to terminate the agreement early.

The employer, relying on the early termination clause, terminated the employee on January 26, 2023, approximately 23-months before the fixed-term contract was set to expire on December 31, 2024. At the time of termination, the employer provided two weeks' termination pay and continued benefits, excluding the pension plan.


Legal Proceedings:

The employee, through summary judgment, challenged the enforceability of the termination clauses, asserting wrongful dismissal and seeking damages for the contract's remaining term. The contact contained a termination for cause clause, as well as the following termination without cause provision:

4.02 The Township may at its sole discretion and without cause, terminate this Agreement and the Employee's employment thereunder at any time upon giving to the Employee written notice as follows:

(i) the Township will continue to pay the Employee's base salary for a period of two (2) weeks per full year of service to a maximum payment of four (4) months or the period required by the Employment Standards Act, 2000 whichever is greater. This payment in lieu of notice will be made from the date of termination, payable in bi-weekly installments on the normal payroll day or on a lump sum basis at the discretion of the Township, subject at all times to the provisions of the Employment Standards Act, 2000.

(ii) with the exception of short-term and long-term disability benefits, the Township will continue the Employee's employment benefits throughout the notice period in which the Township continues to pay the Employee's salary. The Township will continue the Employee's short-term and long-term disability benefits during the period required by the Employment Standards Act, 2000 and will pay all other required accrued benefits or payments required by that Act.

(iii) all payments provided under this paragraph will be subject to all deductions required under the Township's policies and by-laws.

(iv) any further entitlements to salary continuation terminate immediately upon the death of the Employee.

(v) such payment and benefits contributions will be calculated on the basis of the Employee's salary and benefits at the time of their termination. [Emphasis added]


Analysis:

Upon reviewing termination clauses, the court found them incompatible with the ESA due to several factors:

  1. The termination for cause provision denied termination notice or pay for cause without aligning with ESA standards, which require serious misconduct, demonstrated intentionality, and non-condoned behaviour.
  2. The termination without cause provisions failed to provide the full compensation required by the ESA, especially regarding vacation pay. Justice Pierce examined provision 4.02, which stipulated the continuation of the employee's base salary for a specified period, but nothing further. The employee argued that this clause contravened the ESA, citing section 60, which prohibits the reduction of any "wages", which includes vacation pay, during the statutory notice period. Justice Pierce concurred with this argument, emphasizing the importance of aligning contractual terms with statutory requirements to ensure compliance and fairness.
  3. The without cause provision also granted the employer "sole discretion" to terminate "at any time". The employee argued this disregarded ESA limitations, which prohibit termination during protected employee leaves of absence or as retaliation for rights exercised under the ESA. Justice Pierce agreed with this innovative argument, highlighting the potential conflict between contractual language and statutory protections afforded to employees. This groundbreaking interpretation serves as a cautionary reminder to employers to exercise prudence when drafting termination clauses, ensuring alignment with all statutory standards.


Damages and Remedies:

With the termination clause deemed unenforceable, the court awarded damages to the employee for the remaining 101-week term of the agreement underscoring the employer's obligation to honor the terms of the fixed-term contract. This resulted in a total award of $157,071.57.


Conclusion:

The Ontario Superior Court's decision in Dufault v. The Corporation of the Township of Ignace offers valuable guidance for employers on interpreting and enforcing termination clauses in employment contracts. It highlights the importance of regularly reviewing and updating employment agreements to ensure compliance with evolving legal standards. By seeking legal counsel when drafting contractual provisions, particularly termination clauses, employers can mitigate risks of litigation and financial liabilities while safeguarding their interests and upholding employees' rights in Ontario's dynamic employment law landscape.