On December 19, 2024, the Court of Appeal released their highly anticipated decision in Dufault v. Ignace (Township).1 The Court dismissed the appeal and confirmed that the termination provision was unenforceable; however, they declined to comment on the enforceability of the "without cause" termination provision.
Facts
The plaintiff employee signed a fixed-term employment contract with the defendant employer (the "Contract"). The Contract began in November 2022, and was set to end over two years later on December 31, 2024.
The Contract contained the following "with cause" termination provision:
"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."
The Contract also contained the following "without cause" termination provision:
"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.
(iii) all payments provided under this paragraph will be subject to all deductions required under the Township's policies and by-laws.
(iv) any further entitlements to salary continuation terminate immediately upon the death of the Employee.
(v) such payment and benefits contributions will be calculated on the basis of the Employee's salary and benefits at the time of their termination."
The plaintiff was terminated without cause on January 26, 2023, almost two years prior to the end of the Contract. The defendant provided the plaintiff with two weeks' of termination pay in lieu of notice and continued her benefits for two weeks, in accordance with her minimum statutory entitlements under the Employment Standards Act, 2000, S.O. 2000, c. 41 (the "ESA").
Motion Decision
The plaintiff alleged that the termination provisions in the Contract were illegal and unenforceable; as such, she was entitled to a common law notice period. The plaintiff moved for summary judgment for damages for the duration of her fixed-term contract.
Justice Pierce agreed. In the motion decision,2 she briefly reviewed the legal principles governing the enforceability of employment contracts, including:
- Employees have less bargaining power than employers when employment agreements are made, as employees rarely have enough information or leverage to bargain with employers on an equal footing.
- Employees are likely unfamiliar with the minimum standards in the ESA and may not challenge unlawful termination clauses.
- The ESA is remedial legislation designed to protect employees; as such, courts should favour an interpretation of the ESA which encourages employers to comply with the Act and extend its protections to employees.
- Termination clauses should be interpreted to encourage employers to draft ESA-compliant employment agreements. If an order to comply is the only consequence for drafting a non-compliant clause, then employers will have little incentive to comply.
- A termination clause will rebut the presumption of reasonable notice only if its wording is clear.
- If a termination clause is ambiguous, then courts should interpret it in a way that gives the greater benefit to the employee.3
Moreover, employment contracts must be interpreted as a whole; if any part of the termination provisions contravene the ESA, then the entirety of the termination provisions are invalid and unenforceable. This is true even if the employer does not seek to rely on the illegal provision.4
After reviewing the law, Justice Pierce determined that the termination provisions violated the ESA in several ways.
A. The "For Cause" Termination Provision at Article 4.01 is Unenforceable
First, Article 4.01 of the Contract stated that a "for cause" dismissal disentitles the employee to termination notice and termination pay; however, this is a common law standard that is not found within the ESA or its regulations. Instead, section 2(1)(3) of Ontario Regulation 288/01 of the ESA states that "[a]n 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" is not entitled to notice of termination or termination pay.
Here, the employer conflated the "grounds for dismissal under the ESA with a common law standard that does not appear in the ESA."5 Moreover, the test for "wilful misconduct" under the ESA is higher than the test for "just cause":
"In addition to providing that the misconduct is serious, the employer must demonstrate, and this is the aspect of the standard which distinguishes it from 'just cause', that the conduct complained of is 'wilful'. Careless, thoughtless, heedless, or inadvertent conduct, no matter how serious, does not meet the standard. Rather, the employer must show that the misconduct was intentional or deliberate. The employer must show that the employee purposefully engaged in conduct that he or she knew to be serious misconduct. It is, to put it colloquially, being bad on purpose."6
Further, Justice Pierce found that the inclusion of "failure to perform services" in the definition of "for cause" was not the same as wilful misconduct and thus enlarged the criteria for dismissal without notice. Moreover, the Contract did not mention the saving provision of the ESA which limits "wilful misconduct" to conduct that is "not trivial."7
It does not matter that the defendant did not rely on the impugned "for cause" termination provision; if any part of a termination provision contravenes the ESA, then the entirety of the provision is unenforceable.8 Nevertheless, Justice Pierce went on to consider the enforceability of the "without cause" provision at Article 4.02 of the Contract.
B. The "Without Cause" Termination Provision at Article 4.02 is Unenforceable
Article 4.02 provided 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." However, the section 60(1) of the ESA requires that the employee receive all "regular wages" during the notice period, which consists of more than the employee's base salary.9 "Regular wages" also include commissions, vacation pay, and sick days, none of which were provided for in Article 4.02.10
In the most controversial aspect of her decision, Justice Pierce also took issue with Article 4.02 which allowed an employer to terminate an employee "at any time" in their "sole discretion." Justice Pierce noted that this was untrue; an employer's right to dismiss an employee is not absolute.11 For example, employers cannot terminate an employee:
- Pursuant to section 53 of the ESA, at the end of a protected leave, including pregnancy leave, parental leave, family medical leave, sick leave, and bereavement leave; and
- Pursuant section 74 of the ESA, in reprisal for asking an employer to comply with the ESA, inquiring about their rights under the ESA, filing a complaint with the Ministry under the ESA, exercising or attempting to exercise a right under the ESA, providing information to an employment standards officer, and inquiring or disclosing their pay to their coworkers to ensure that their employer is complying with the
Damages
Justice Pierce determined the quantum of damages with reference to the decision from Howard v. Benson Group Inc. (The Benson Group Inc.). The Court in Benson Group held that an employee who is terminated without cause in a fixed-term employment contract without an enforceable provision for early termination without cause is entitled to receive the wages and benefits for the entire duration of the contract.12 Accordingly, she awarded the plaintiff with $157,071.57 in damages, representing 101 weeks of base salary and benefits, less the 2 weeks of salary and benefits already paid by the defendant.13
Appeal
The defendant appealed the motion decision and argued that the termination provisions complied with the minimum standards set by the ESA. The appeal was dismissed.
The Court decided the appeal solely on the basis of the "for cause" termination provision. The Court found that Article 4.01 contravened the ESA for the following reasons:
- The standard for wilful misconduct established in section 2(1)(3) of the Ontario Regulation 288/01 of the ESA is higher than the standard for just cause dismissal at common law. Wilful misconduct requires conduct done by employees "deliberately, knowing they are doing something wrong" and has been described as "being bad on purpose."14 As such, an employee terminated "for cause", but not "wilful misconduct" remains entitled to notice of termination and termination pay; if the employer does not provide this, then they are in contravention of the ESA.15
- The "for cause" provision also provides a more expansive definition of "cause" that does not amount to wilful misconduct. For instance, "failure to perform services" does not amount to wilful misconduct.16
The Court also declined the defendant's request to reconsider the Court of Appeal's decision in Waksdale v. Swegon North America Inc.:
"In Waksdale, this court held that the termination provisions in an employment contract must be read as a whole. If one termination provision in an employment contract violates the ESA minimum standards, all termination provisions in the contract are invalid. This holding in Waksdale was followed in Rahman.
As a three-judge panel, we are precluded from reconsidering the holding in Waksdale. Following the holding in Waksdale, because the "for cause" termination clause in the employment contract is void as contrary to the ESA minimum standards, all termination provisions in the contract are invalid. Although the termination of the respondent was without cause, whether or not the "without cause" termination provision is itself contrary to the ESA minimum standards is irrelevant. Both termination clauses are invalid and unenforceable."17
The Court also declined to consider Justice Pierce's conclusions on the "without cause" provision:
"Given our conclusion that the "for cause" termination clause of the employment contract is unenforceable as contrary to the ESA and that, pursuant to Waksdale, this renders all of the termination provisions unenforceable, it is not necessary to consider the appellant's arguments that the motion judge erred in finding the "without cause" termination clause also unenforceable as contrary to the ESA, and we expressly do not rule on that submission. The appellant argued that the motion judge's findings in relation to the "without cause" termination clause may affect other employment contracts. In our view, resolution of the issues the appellant raises regarding the "without cause" termination clause should be left to an appeal where it would directly affect the outcome."18
The Court affirmed Justice Pierce's award of damages based on the plaintiff's entitlement under the remainder of the fixed-term contract.
Conclusions
Unfortunately, this decision did little to address the question of the enforceability of "without cause" termination provisions which allow employers to terminate employees "at any time" in their "sole discretion." It seems likely that this question will continue to plague employers and employment lawyers until the Court of Appeal is forced to address this issue directly. Employers should avoid using language in termination provisions stating that an employee's employment can be terminated "at any time" and "in the their sole discretion."
What Does This Mean for Employers?
Both decisions in Dufault emphasize the need for clearly and carefully-drafted termination provisions in employment contracts. Dufault also demonstrates the significant risk and liability that poorly-drafted termination clauses can cause for employers, particularly those who enter into fixed-term employment contracts. To limit their exposure, employers should make it a practice to regularly review their employment contracts with an employment lawyer to ensure that they comply with the ESA and remain enforceable in the ever-changing landscape of employment law in Ontario. Moreover, pending a final resolution of the "without cause" termination provision issue, employers should err on the side of caution and avoid including the impugned terminology in their employment contracts.
What Does This Mean for Employees?
This decision reflects the employee-friendly approach that courts have taken to employment contracts in Ontario. While there is no guarantee that this interpretation will prevail in the coming years, employees with a "without cause" termination provision that allows their employers to terminate them "at any time" in their "sole discretion" should be aware of the enforceability issues with their contract and the potential remedies available to them following their termination. Employees should consult with an employment lawyer to determine whether their contract is enforceable and whether any severance package offered to them is consistent with their legal entitlements.
Footnotes
1. 2024 ONCA 915 [Dufault, ONCA].
2. Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029 [Dufault, ONSC].
3. Ibid at para 19, citing Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 at para 28.
4. Waksdale v. Swegon North America Inc., 2020 ONCA 391 at para 10-11 [Waksdale]; Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451 at para 30 [Rahman].
5. Ibid at paras 32-38.
6. Plester v. PolyOne Canada Inc., 2011 ONSC 6068 at para 55.
7. Dufault, ONSC, supra at para 37.
8. Waksdale, supra at paras 10-11 and Rahman, supra at para 30.
9. Ibid at para 42.
10. Ibid at paras 43-45.
11. Ibid at para 46.
12. Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256 at para 44.
13. Dufault, ONSC, supra at paras 48-51.
14. Rahman, supra at para 28.
15. Dufault, ONCA, supra at paras 16-18.
16. Ibid at paras 19-21.
17. Ibid at paras 23-24 [citations omitted].
18. Ibid at para 25.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
