In Dufault v. The Corporation of the Township of Ignace ("Dufault"), the Ontario Superior Court of Justice, on a summary judgment motion, found the termination without cause provision of a fixed-term employment contract illegal and unenforceable because the language did not comply with the Employment Standards Act, 2000 ("ESA").

In keeping with prior case law, the Court reasoned that in evaluating a termination without cause provision, the wording must mirror the intention and meaning of the language in the ESA. The decision, in part, found that language permitting the employer to terminate the employee's employment without cause in the employer's "sole discretion" and "at any time" was contrary to the ESA and therefore unenforceable. As a result, the Court held that the Plaintiff was entitled to damages equivalent to the balance of payments owing under her fixed-term contract.

Background

The Plaintiff commenced employment with The Corporation of the Township of Ignace ("The Township") on October 31, 2021. On or about November 24, 2022, the Plaintiff entered into a fixed-term employment agreement with a term ending December 31, 2024 (the "Employment Agreement").

Among other provisions, the Employment Agreement contained the following termination provision (reproduced in part):

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.

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, 2000whichever 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]

On January 26, 2023, the Plaintiff's employment was terminated on a "without cause" basis, prior to the expiry of the term of the Employment Agreement. The Plaintiff was provided with her entitlements in accordance with the "without cause" termination provision contained in the Employment Agreement (i.e. two (2) weeks' termination pay, and continuation of her benefits and pension participation for the same time period). She subsequently argued that because the “without cause” termination provision was unenforceable, she was entitled to be paid the balance of the payment owing under her fixed-term contract, for the remainder of the term.

Summary Motion Decision

The Ontario Superior Court of Justice held that the termination provisions contained in the Employment Agreement were unenforceable and as a result, the Plaintiff was awarded damages equal to the balance owing for the remainder of her fixed-term contract (i.e. 101 weeks’ pay), less any amounts already paid. In rendering his decision, Justice Pierce, agreed with the Plaintiff and found the following:

• the termination "for cause" provision purported to allow The Township to terminate the employee's employment without paying the employee their minimum statutory notice (and severance, if applicable) entitlements using a "for cause" standard that was broader than is found in the ESA, conflating the grounds for dismissal under the ESA with a common law standard that does not appear in the ESA, and thereby contravening the ESA;

• the termination "without cause" provision wrongly purported to provide the employee with termination pay equal to only her "base salary" over the statutory notice period, thereby contravening the ESA. Justice Pierce stated that the ESA requires: (a) that an employee be paid their "regular wages" over the notice period (s. 60); and (b) "regular wages" includes vacation pay and the provision wrongly did not reference vacation pay (s. 61); and

• most notably, the termination "without cause" provision permitted the employer to terminate the employee without cause in the employer's "sole discretion" at "any time". Justice Pierce noted that the ESA prohibits an employer from terminating on the following occasions: (a) conclusion of an employee's leave (s. 53); or (b) in reprisal for attempting to exercise a right under the ESA (s. 74) such that the employer did not have unfettered discretion to terminate the employee “at any time.” As a result, the use of this language was held to contravene the ESA.

Impact and Action

It is important to note that Dufault does not develop new law, rather, it applies and expands upon well-settled principles (see, for example, our previous blog articles on the Waksdale decision). The Court's decision to render the termination provision unenforceable on the basis that it purports to permit an employer to terminate an employee's employment at its "sole discretion" and "at any time" is a new development and expansion in this line of case law. As a result, employment agreements with similar language may be called into question when previously, they may have been arguably enforceable.

Dufault further highlights the risks associated with fixed-term contracts and serves as a reminder that fixed term employment agreements should typically be avoided, particularly when used for prolonged durations. If used, fixed-term contracts should be for short durations and carefully drafted to ensure an enforceable termination provision.

Next Steps

It is prudent for employers to review their existing employment agreements and employment agreement templates (particularly if they have not done so for an extended period of time) to ensure they reflect current law and remain enforceable. As a reminder, changes to any existing employment agreements will likely require fresh consideration. We will continue to watch to see if Dufault and the reasoning contained therein is followed in any subsequent Ontario decisions and/or if Dufault is appealed.

[View source.]