Legislative Compliance

Futureproofing the Fine Print: Termination Clauses in Ontario

July 16, 2020

Common-law awards for termination tend to be substantially greater than the notice or statutory severance payments required under legislation, so employers have long tried to write termination clauses into contracts that explicitly limit employees to their legislative entitlements alone. Over years of complex litigation, Ontario courts frequently have struck down these termination clauses as unenforceable, often for very subtle choices of wording, to the point that it can seem almost impossible to write a contract that will actually hold up in court. Two recent decisions from Ontario courts make this task harder still.

The two decisions, Waksdale v. Swegon North America Inc. and Rutledge v. Canaan Construction Inc., once again narrow the scope of acceptable termination clauses in Ontario employment contracts. Courts generally hold that employers have more power in the workplace, particularly in setting terms of employment contracts, and therefore bear the greater responsibility to craft terms that are legally compliant and do not deprive employees of their legal rights and entitlements. What makes these decisions important is how broadly they read those rights.

In the first case, an employee was fired without cause. The court found that the employment contract’s ‘without cause’ provisions were perfectly fine, but that the ‘with cause’ provisions were unenforceable because it allowed for termination with cause at a lower standard than the legislation. In this case, the ‘with cause’ provision had become unenforceable because of subsequent changes to the legislation. The court found that despite the contract including language about severability—that is, if one part of the contract was unenforceable, it could be severed, and the rest of the contract would still hold—the two kinds of termination provisions had to be considered together. Because one part was unenforceable, all the termination provisions were, even though, again, the employee was fired without cause and it was only the ‘with cause’ part that was unenforceable.

In the second case, a construction employee was dismissed without notice or severance pay, which Ontario legislation allows. The employee’s contract reflected that as a construction employee, they were not entitled to notice or severance pay. The court found, however, that because the employee could have worked for that employer in a non-construction position in the future, and because the employer could have grown enough that it had to pay severance, the termination provision was unenforceable. 

What this means for employers is that termination provisions seeking to limit employees to their statutory entitlements and nothing more must be more precisely worded than ever before, and should include language that allows for changes to the legislation, to the employee’s work, or the employer’s conditions themselves. Ontario employers should consult legal counsel to determine whether their employment contracts would survive challenges under the new framework. Bear in mind, however, that an employer cannot unilaterally change an existing contract. If you want to update a term, you generally need to provide fresh consideration to the employee, or provide the same notice you would have to if you terminated them without cause (which, given these recent decisions, might not be as straightforward as it sounds). Bear in mind, too, that changing the termination provisions for all of your employment contracts can hurt morale at the best of times. In the middle of a pandemic, when millions of people have already lost their jobs, any such update should be handled delicately, with all the tact you can muster. 

Termination can be expensive for employers, but it’s devastating to employees. It’s not just for courts to protect employees’ rights—their employers must, too. Taking care to create employment contracts that are fair to both parties starts the employment relationship off right, and making necessary revisions to preserve that fairness can help maintain trust. With how complex the history is for termination provisions in Ontario case law, it’s definitely worth consulting legal counsel whenever major changes occur in legislation or the common law, in addition to an annual review. If you need more guidance, whether with terminations or anything else HR, we’re here to answer your questions and provide you the resources you need to get back to loving what you do. 

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