Over the past several years, Ontario employers have had to deal with the aftermath of several court decisions which effectively make termination provisions in their employment agreements unenforceable. From our perspective as counsel to employers, one of the primary benefits of employment agreements is the ability to limit the potential liabilities arising from the termination of employment, while still ensuring that dismissed employees are treated fairly. As a result of these recent decisions, many Ontario employers have been required to enter into brand new employment agreements with their staff in order to limit dismissed employees’ entitlements at common law.
The latest decision in February 2024 by the Ontario Superior Court in Dufault v. The Corporation of the Township of Ignace (“Dufault”) dealt yet another blow to employers who rely on their termination provisions in their employment contracts to limit their liability to employees on termination. While it is understood that courts across the country will closely scrutinize any employment agreement which purports to limit an employee’s common law rights, and that any ambiguities will be decided in favour of the employee, Dufault went even further. For the first time, the Ontario court applied this scrutiny to commonly used language in termination provisions across the country.
The plaintiff employee’s employment agreement contained the following provision regarding termination without cause:
“The [Employer] may at its sole discretion and without cause, terminate this Agreement and the Employee’s employment thereunder at any time upon giving the Employee written notice as follows…” (emphasis added)
The court determined that an employer’s right to terminate an employee was not absolute as the Ontario Employment Standards Act (the “Act”) prohibits an employer from terminating an employee in certain circumstances, including during any period of protected leave or in reprisal for exercising a right under the Act. As such, any termination provision which purports to give an employer the right to terminate an employee “in its sole discretion” and “at any time” violates the provisions of the Act and is unenforceable.
Given that the wording of this termination clause has been common in employment agreements for many years, Ontario employers once again find themselves having to revisit their employment agreements to ensure that their termination provisions are compliant with the wording in the Act.
We have reviewed the decision and believe that there is a reasonable prospect that if this decision is appealed, the Ontario Court of Appeal may reach a different conclusion. However, the court in Dufault did identify other deficiencies with the plaintiff employee’s employment agreement (primarily relating to compliance with the provisions of the Act) which would have rendered it unenforceable in any event, and therefore, it is unknown at this time whether the defendant will choose to proceed with an appeal.
Many companies with employees outside of Ontario may be wondering why this decision is of any concern to them, given that they are not subject to the Ontario Act. However, unlike other recent Ontario decisions regarding employment agreements, the court’s findings on the “at any time” wording in the termination clause are not restricted to unique requirements of the Ontario Act, and rather, have broad implications for employers across the country, including Alberta.
Most provincial employment standards statutes contain protected leaves and other prohibitions on termination in certain circumstances, and not all of them provide exceptions to these prohibitions. As noted above, the wording of this termination clause is fairly common in employment agreements across the country. It is unknown at this time if the findings in Dufault will be accepted and applied by courts in other provinces, but unless or until the Ontario Court of Appeal or the Supreme Court of Canada reverses those findings in some way, it would be prudent for all employers to consider making changes to their employment agreements to ensure compliance with their own governing employment legislation, out of an abundance of caution.
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The lawyers of the Bishop & McKenzie Employment Law Group are ready to answer your questions and to assist you with any matters relating to your employment agreements, so please feel free to reach out to us at any time.
Feel free to contact our Group Leads, Tara L. Hamelin and Kerry Lynn Okita, with any questions you might have. We are here to help you get back to your business.