Update: Dufault was appealed to the Court of Appeal for Ontario (OCA) and arguments were heard on December 6, 2024.  At this time, the OCA’s decision has not been released. 

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In Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029, the Ontario Superior Court of Justice held that the termination provisions of a fixed-term employment contract were illegal and unenforceable because they did not comply with the Employment Standards Act, 2000 (ESA). Accordingly, the court found that the employee had been wrongfully dismissed and awarded her damages equal to the remaining term of the Agreement.

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

Following its review of the basic principles for the determination of the enforcement of a termination clause and the interpretation of employment contracts, the 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 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).

In determining the quantum of damages the employee was entitled to, the court noted:

…in the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation.

Accordingly, the court found that the employee was wrongfully dismissed and awarded her damages as follows: 101 weeks’ base salary and benefits less two weeks’ termination pay and benefits provided to date for a total of $157,071.

Bottom Line for Employers

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