Employment Update – Employee Benefits & Compensation

Ontario Court Finds Termination Clause Invalid, Employee
Receives $150K in Damages

Ontario employers, including charities and not-for-profits, may
need to update their employment contracts again to ensure the
language in termination clauses complies in exacting detail with
provincial minimum employment standards legislation. In Dufault v The Corporation of the Township of
Ignace, a wrongful dismissal decision published February
16, 2024, the Ontario Superior Court (the “Court”) struck
down the termination clause in the fixed-term contract (the
“Contract”) between the plaintiff, Karen Dufault (the
“Employee”), and the defendant, the Township of Ignace
(the “Employer”). The Court found that certain language
in both the “for cause” and “without cause”
sections of the Contract’s termination clause contravened parts
of the Employment Standards Act, 2000 (ESA) and therefore
the entire termination clause was deemed not enforceable. That left
the Employee with damages for the whole remainder of the Contract
term: 101 weeks’ salary and benefits, for a total award of
$157,071.57.

The Employee was hired in October 2021 as a Youth Engagement
Coordinator, which continued for over a year until November 2022,
when the Employee signed a fixed-term employment contract with the
Employer, with an end date on December 31, 2024. The Employer
terminated the Contract early on a “without cause basis”
in January 2023, and paid the Employee $2,884.61 plus some benefits
for two weeks’ compensation. At the time of termination, the
Employee was earning a base annual salary of $75,000 plus benefits.
Facing a summary judgment for wrongful dismissal, the Employer
argued the Contract was clear and they had met their legal
obligations by paying the minimum of two weeks’ salary in lieu
of notice as required under the ESA. The Court did not agree.

The Contract was found to contravene the ESA in three respects,
according to the Court. Firstly, the use of “for cause”
in the Contract “conflates grounds for dismissal under the ESA
with a common law standard that does not appear in the ESA.”
The statutory test for termination without notice is a higher
threshold and involves “wilful misconduct” as stated in
an ESA regulation (O Reg 288/01), the Court noted. “For
cause” or other language that expands the scope of dismissal
beyond what is stated in the ESA fails to meet the test and does
not justify termination without notice. Secondly, the “without
cause” section of the Contract’s termination clause
differed from the ESA by providing payment of the Employee’s
“base salary” for the notice period, whereas the ESA
provides all “regular wages” without any reduction, or a
lump sum payment in lieu of notice, which includes commissions. In
this case the Court also included vacation pay and paid sick days
as part of “regular wages” identified in the Contract.
Thirdly, the Contract stated that the Employer had “sole
discretion” to terminate the Employee’s employment
“at any time.” That language is incorrect, the Court
found, because the ESA requires employment to be reinstated after a
job-protected leave of absence, and does not allow termination
“in reprisal for attempting to exercise a right” under
the ESA. As a result of these contraventions, the Court held the
termination clause was unenforceable. Since the Contract was on a
fixed term, and there was no valid clause for early termination,
the Employer owed the Employee the rest of her salary as if she had
completed all of her work until the end date.

Jurisprudence in Ontario “has demanded stricter standards
to achieve compliance with the ESA” since 2015, the Court
stated, citing precedent case law. The Dufault decision is
the latest in a line of recent cases since Waksdale v Swegon
North America Inc. that has made it significantly more
difficult for employers in Ontario to terminate employees, with or
without cause, while paying out termination amounts limited to the
minimum standards required by the ESA. Unless employers can draft
termination clauses that are precise and wholly compliant with
provisions of the ESA to the satisfaction of judges, a challenging
and uncertain endeavour, they may be required to follow common law
notice periods — far lengthier, and much more expensive, than
the minimums provided under the ESA. It remains to be seen how
further judgments will follow this trend — or reverse it
— and whether, or how, the Ontario legislature will
respond.

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