Applying prior precedent, the Court of Appeal for Ontario (OCA) in Dufault v. Ignace (Township), 2024 ONCA 915, upheld the Ontario Superior Court of Justice’s (OSCJ) finding that the “for cause” termination provision in an employee’s fixed-term employment contract was illegal and unenforceable because it did not comply with the Employment Standards Act, 2000 (ESA). The OCA also upheld the OSCJ’s finding that the employee had been wrongfully dismissed and was entitled to damages equal to the remaining term of the contract in the amount of $157,071.  

Background

The employee and employer executed a fixed-term agreement in which they agreed that the employee’s employment would end on December 31, 2024 (“Agreement”). On January 26, 2023, however, the employer dismissed the employee effective immediately on a without-cause basis and paid her two weeks’ termination pay and continued her benefits for two weeks, except for her pension plan, which was terminated effective immediately.

The employee argued by way of summary judgment that the termination clauses in Article 4.0 of the Agreement were illegal and unenforceable. She claimed she was wrongfully dismissed when the Agreement was breached and sought damages for its remaining duration.

The relevant termination clauses provided:

4.01 The Township may terminate this Agreement and terminate the Employee’s employment at any time and without notice or pay in lieu of notice for cause. If this Agreement and the Employee’s employment is terminated with cause, no further payments of any nature, including but not limited to, damages are payable to the Employee, except as otherwise specifically provided for herein and the Township’s obligations under this agreement shall cease at that time. For the purposes of this Agreement, “cause” shall include but is not limited to the following:

(i) upon the failure of the Employee to perform the services as hereinbefore specified without written approval of Municipal Council and such failure shall be considered cause and this Agreement and the Employee’s employment terminates immediately;

(ii) in the event of acts of willful negligence or disobedience by the Employee not condoned by the Township or resulting in injury or damages to the Township, such acts shall be considered cause and this Agreement and the Employee’s employment terminates immediately without further notice. [Emphasis added]

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. [Emphasis added]

Decision of the OSCJ

The lower court concluded that termination clauses 4.01 and 4.02 in Article 4.0 of the Agreement were unenforceable as they contravened the ESA in the following respects:

(1) Article 4.01 of the Agreement incorrectly denies the employee notice of termination or termination pay when the employee is terminated “for cause.” This approach is not taken in the ESA, or its regulations. Section. 2(1)(3) of Ontario Regulation 288/01 of the ESA (Regulation) defines an employee not entitled to notice of termination or termination pay more narrowly as, “An employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” Accordingly, in addition to demonstrating that the misconduct is serious, the employer must demonstrate that the conduct is “wilful,” i.e., intentional or deliberate, “bad on purpose,” conduct that the employee purposefully engaged in that they knew was serious misconduct.

(2) The “without cause” provisions at Article 4.02 of the Agreement contravenes the ESA because it incorrectly provides only for payment of “the employee’s base salary for two weeks per year of service to a maximum of four months or the period required by the ESA, whichever is greater.” [Emphasis added] However, s. 60 of the ESA provides that wages may not be reduced during the notice period, when the employee is entitled to receive all “regular wages.” Vacation pay forms part of “regular wages”; however, Article 4.02 incorrectly does not reference compensation for vacation pay (s. 61).

(3) Finally, and most significantly, Article 4.02 misstates the ESA because it gives the employer “sole discretion” to terminate the employee’s employment at any time. The right of the employer to dismiss is not absolute: the Act prohibits the employer from terminating an employee on the conclusion of an employee’s leave (s. 53) or in reprisal for attempting to exercise a right under the Act (s. 74).

Employer’s Arguments on Appeal

On appeal, the employer argued:

• both termination clauses are consistent with the minimum standards set by the ESA; and

• if the OCA concludes that the “for cause” termination clause at Article 4.01 is void for non-compliance with ESA minimum standards, but the “without cause” clause at Article 4.02 does not contravene ESA minimum standards, the “for cause” clause should be severed and the “without cause” clause should be preserved; accordingly, the OCA’s prior decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391, should be reconsidered by a five-judge panel of the OCA and the OCA should decline to follow Waksdale.

OCA Decision

On appeal, the OCA denied the employer’s request to convene a five-judge panel to reconsider Waksdale. Because it was a three-judge panel, the OCA was bound by its decision in Waksdale.  

The OCA upheld the OSCJ’s finding that the “for cause” termination clause at Article 4.01 violated the ESA because it defined “cause” more broadly than the narrow exception created by s. 2(1)3 of the Termination and Severance of Employment, O. Reg. 288/01 under the ESA (Regulation).

Following the law pertaining to the interpretation of employment contracts established by Justice Laskin in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, the OCA emphasized:

• The partial definition of “cause” in the “for cause” termination clause in Article 4.01(i) – i.e., “the failure of the Employee to perform the services as hereinbefore specified” – does not require the level of “wilful misconduct” required in s. 2(1)3 of the Regulation;

• Termination clauses should be interpreted in a manner that encourages employers to draft agreements that comply with the ESA. If the only consequence for an employer that drafts a termination clause that does not comply with ESA minimum standards is an order to comply, employers would lack incentive to draft an enforceable termination clause when the employment relationship commences; and

• The answer to the question whether a termination clause meets ESA minimum standards is based on its wording. Even if an employer complies with ESA minimum standards upon the termination of an employee’s employment, that does not remedy a termination clause that does not comply with ESA minimum standards in an employment contract entered into at the commencement of the employee’s employment.

In dismissing the appeal, the OCA relied on its holding in Waksdale that termination clauses in an employment contract must be read as a whole and if one termination clause violates the ESA’s minimum standards, all termination clauses in the contract are invalid.

Although the termination of the employee’s employment was without cause, the OCA decided the appeal solely on the basis that the “for cause” termination clause in Article 4.01 did not comply with the ESA’s minimum standards. The OCA did not believe it was necessary to consider whether the “without cause” termination clause in Article 4.02 complied with minimum ESA standards because, pursuant to Waksdale, the unenforceability of the “for cause” termination clause rendered all termination clauses in the Agreement unenforceable.  

The OCA rejected the employer’s argument that the lower court’s findings regarding the “without cause” termination clause may affect other employment contracts, stating that “resolution of the issues the [employer] raises regarding the ‘without cause’ termination clause should be left to an appeal where it would directly affect the outcome.”

Notably, in taking this approach, the OCA did not decide whether a “without cause” termination clause is void and unenforceable because it provides:

• Only for payment of “the employee’s base salary for two weeks per year of service to a maximum of four months or the period required by the ESA, whichever is greater”; or

• That an employer may terminate an employee in the employer’s “sole discretion” and “at any time.”

Bottom Line for Employers

The decision of the OCA in Dufault reinforces and executes the Waksdale approach for determining whether termination clauses in an employment contract are enforceable.

While each case is decided on its own facts, employers are encouraged to review their employment agreements with legal counsel to consider the impact that this decision may have. More generally, this decision demonstrates how important it is that termination clauses in employment agreements comply with the ESA.

It is recommended that employers update their employment agreements on a regular basis, and at least annually.

In general, employers are encouraged to seek the guidance of experienced employment counsel when drafting employment agreements.