More termination clause drama in Ontario

An Ontario court has delivered yet another unfortunate termination clause decision¹. Employers may see articles and blogs once again announcing that a wide range of termination clauses are unenforceable and employees are free to claim expansive damages upon dismissal.

Any such statement is premature at best.

The reality is that the law of employment contract termination clauses is unsettled in Ontario at the moment, and this latest decision merely adds to the uncertainty.

This time around:

• The court followed an earlier ruling, finding that a “without cause” termination clause was unlawful because it reserved the employer’s right to terminate “at any time.”

The reasoning here was that such language reserves the right to terminate when an employee is subject to legal protections, such as during a statutory leave of absence.

• The court also held that a “just cause” termination clause was unlawful because it allowed for termination “without prior notice or compensation of any kind.” In doing so it failed to allow for the possibility the employee might, in some scenarios, remain entitled to termination entitlements under the Employment Standards Act, 2000.

This ruling was made despite the fact the clause in question committed to payment of “any minimum compensation or entitlements prescribed by the Employment Standards Act.” The reasoning here was that “a regular employee cannot be expected to appreciate the difference” between scenarios in which employees are entitled to statutory amounts, and scenarios where they are not.

Both of these conclusions run counter to recent decisions from the same court – the Ontario Superior Court of Justice. Until the Ontario Court of Appeal steps in to resolve this competing case law, employers and employees cannot know whether:

• The wording “at any time” invalidates a termination clause.
• The enforceability of a just cause clause should turn on a court’s assessment of what a “regular employee” is assumed to understand, or rather on the plain wording of the clause itself.

Until we receive clarity, employers should:

• Consult with counsel to review their existing termination clauses for vulnerabilities and in drafting new employment agreements to prevent contentious drafting issues like those above.
• Consult with counsel upon receiving any demand letter that characterizes a termination clause as “unenforceable.” Employer counsel can assist in accurately assessing the strength of an employment contract.