Employment contracts often contain terms that govern how and when employees may be terminated and what they will receive if they are. These terms frequently limit what the employee would otherwise receive at common law. A dismissed employee will sometimes seek to have such terms deemed unenforceable by a court so they can claim what they would have been entitled to otherwise.
We have previously written about the complicated area of law applicable to this issue. The Court of Appeal recently considered the issue again in Dufault v. The Corporation of the Township of Ignace.
Termination Clauses Generally
Termination clauses in employment contracts often specify what happens if an employee is dismissed “for cause” and if they are dismissed “without cause.” These are primarily common law concepts. A “for cause” (or “just cause”) dismissal generally occurs where an employee’s behaviour is sufficiently bad to justify dismissal. A “without cause” dismissal occurs when an employer terminates an employee for a reason other than misconduct.
Employees are generally entitled to advance notice of the termination of their employment where that termination is “without cause.” Practically, this often takes the form of a payment made to the employee in lieu of that notice period or “pay in lieu of notice.” The common law sets out various rules that apply to determining the amount of pay in lieu of notice to which a particular employee is entitled when they are dismissed “without cause.”
The Employment Standards Act, 2000 and its regulations set out some of the minimum standards an employer must abide by when terminating an employee, including notice periods. Where the terms of an employment contract violate that legislation, they will be deemed unenforceable since an employer cannot contract out of or waive those standards.
Case Concerned Clauses Referencing “For Cause” and “Without Cause” Termination
In Dufault, the plaintiff employee held a position with the defendant employer, the Corporation of the Township of Ignace. The employee was dismissed on a “without cause” basis and was paid two weeks’ termination pay plus certain benefits. Rather than the two weeks’ pay, the employee sought damages equal to 101 weeks’ base salary plus benefits (less what she had already received). She argued the termination clauses in her employment contract were unenforceable.
The termination clauses specified what would happen if the employee was dismissed “for cause” and “without cause.” The clauses gave the employer the right to terminate the employee’s employment “at any time and without notice or pay in lieu of notice for cause.” It defined “cause” as including the failure to perform the services she was required to perform and “acts of willful negligence or disobedience.” It also specified that the employer had the right to terminate employment “at its sole discretion and without cause” by providing certain payments and benefits to the employee.
The employee’s primary argument was that the termination clauses in her employment contract were illegal and unenforceable.
Court Reviews Legal Principles Around Enforcement of Termination Clauses
The Court of Appeal noted three particular legal principles that were key to determining whether or not to enforce the termination clauses at issue in the case before it. First, the Employment Standards Act, 2000 is “remedial legislation” intended to protect employees. As such, courts will favour an interpretation of the statute “that encourages employers to comply with its minimum standards.”
Second, courts must interpret termination clauses to encourage the drafting of employment contracts that comply with the statute. The possibility that such a clause will be deemed unenforceable incentivizes the use of “a lawful termination clause at the start of the employment relationship.”
Third, a termination clause that is not compliant with the statute when the employment contract takes effect will not be saved by the employer’s subsequent compliance with the minimum standards included in that statute at the time of termination.
It should also be noted that if a specific termination clause of an employment contract violates the Employment Standards Act, 2000, all the other clauses concerning termination are also invalid and unenforceable (see Rahman v. Cannon Design Architecture Inc.). A court must interpret the employment contract as a whole. The contract’s wording matters when determining a clause’s enforceability, not what the employer does at termination.
Court Finds Termination Clauses Unenforceable
Termination Clause Conflicted With the Employment Standards Act
First, the Court of Appeal noted that the Employment Standards Act, 2000 and its regulations specify an employee is not entitled to notice of termination or pay in lieu thereof where they are “guilty of willful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer.” As the Court noted, this is a “high level” of misconduct and more than is ordinarily required for “just cause” dismissal at common law. In other words, under the statute and its regulations, an employee is not entitled to notice or termination pay when they are “being bad on purpose.” As such, it is possible for an employee terminated “for cause” at common law to be entitled to notice or pay in lieu thereof under the statute where the employee’s misconduct was not deliberate.
The employment contract stipulated the employee’s failure to provide services would constitute behaviour justifying “for cause” termination, even though it would not constitute misconduct under the legislation that justified a lack of notice or pay in lieu thereof. As such, the contract was not compliant with the legislation.
Contract’s Definition of “For Cause” Too Broad
In addition, the definition of “for cause” in the employment contract was very broad because the definition was not exhaustive. Instead, the contract defined the term as including certain situations but not being limited to them. Therefore, something unspecified in the contract could constitute behaviour justifying “for cause” termination even though it was less serious than the “willful misconduct” standard specified in the statute and its regulations. This, too, was recognized by the Court of Appeal as problematic. The “for cause” termination clause was thus deemed unenforceable.
Because “For Cause” Clause Failed, So Too Did “Without Cause” Clause
The Court of Appeal did not consider whether the termination clause applicable to “without cause” termination was itself enforceable. As noted above, when one termination clause is found unenforceable, they all are, so the “without cause” clause was also deemed unenforceable by the Court.
It is worth noting, however, that the Superior Court of Justice had previously found that the “without cause” clause was also unenforceable in and of itself. Specifically, the Court noted that the “without cause” clause allowed the employer to terminate employment at any time in the employer’s “sole discretion.”
As the Court observed, the Employment Standards Act, 2000 prohibits an employer from terminating an employee in two specific circumstances: at the conclusion of the employee’s leave (section 53) and “in reprisal” for attempting to exercise a right under the statute (section 74). Accordingly, the Court found that the right of an employer to terminate an employee was not absolute under the statute, and the “without cause” clause in the employment contract thus violated the statute and was unenforceable.
Bader Law Provides Comprehensive Employment Contract Services in Oakville & Mississauga
Many employees are unaware of their workplace rights and fear the consequences of speaking up. If you’re facing ongoing issues, discrimination, or wrongful dismissal, you don’t have to navigate it alone. At Bader Law, our experienced employment lawyers advocate for non-unionized employees, simplifying the law so you can understand your options and make informed decisions. Drawing on our deep knowledge of employer strategies, we provide insightful guidance and dedicated support to protect your rights. To schedule a consultation, please contact us online or call 289-652-9092.