The Ontario Superior Court of Justice recently released its decision in Kopyl v Losani Homes (not yet cited) (the “Decision”), providing insight into the enforceability of fixed terms in employment agreements in circumstances where the agreement’s termination clause is unenforceable.

Background

Earlier this year, we wrote about fixed term agreements on this blog. We highlighted that the distinction between a fixed term and indefinite term employment agreement is of critical importance.

Typically, an employer is not liable for any statutory notice or pay in lieu of notice upon the expiry of a fixed-term agreement that has a fixed term of twelve months or less. However, where a fixed-term agreement is longer than twelve months, the employee will be entitled to statutory notice or pay in lieu of notice, even in connection with the expiration of the fixed term.

If a fixed term employment agreement is terminated before the end of the term and the agreement does not include a clear and enforceable termination provision that meets or exceeds the minimum standards of the Ontario Employment Standards Act, 2000 (the “ESA”), the employee will be entitled to receive damages equal to the unexpired portion of the term (without any set off for mitigation earnings). This approach is distinct from how damages would be assessed in the case of an indefinite term relationship. For further discussion of this topic, please see our blog post on Howard v Benson Group, Inc. decision.

In the Decision, the Court was faced with determining the impact of the invalidity of a termination provision in a fixed term agreement.

Key Facts

The Plaintiff was an employee of Losani Homes (“Losani”). The Plaintiff’s employment agreement outlined a one-year employment term, starting on July 6, 2022. Before the end of that one-year term, Losani terminated the Plaintiff’s employment.

Both the Plaintiff and Losani agreed that the termination clauses in the agreement were void due to violations of the ESA. However, the parties took different positions on the implications of that invalidity.

The Plaintiff argued that the invalid termination clauses did not void the fixed term of the relationship because the fixed term provision differed from a termination clause. Thus, the Plaintiff argued that she was entitled to receive what she would have otherwise earned under the employment agreement until the end of the fixed term, as if she had continued working (without any set off for mitigation earnings).

Conversely, Losani cited Waksdale v. Swegon North America Inc. for the proposition that courts will not enforce termination clauses that partly or wholly violate the ESA. Losani argued that the clause fixing the agreement term to one year was, in effect, a “termination clause” (and so ought to be void along with the other invalid termination provisions). According to Losani, the Plaintiff’s entitlement was therefore to receive “reasonable notice” (or damages in lieu thereof) as calculated and determined in accordance with the common law (which would include a set off for mitigation earnings).

The Decision

The Court agreed with the Plaintiff, such that the fixed term provision of the employment agreement was found to be valid and enforceable.

The Decision emphasizes that our courts are concerned with guarding against certain “mischief” in termination clauses, where these clauses attempted to limit payment upon termination in violation of statute or common law. However, as the Court noted, fixed term agreements do not necessarily violate the ESA or restrict common law employee rights, so the courts do not need to protect employees against any “mischief” arising from such clauses.

In this case, there was nothing illegal in unambiguously fixing a one-year term. As a result, the Court refused to void the entire employment agreement (including the one-year fixed term) along with the invalid termination clauses, which were considered separate and distinct from the remainder of the agreement.

Ultimately, the Court awarded the Plaintiff the wages and benefits that she would have received until the end of her one-year fixed term.

Key Takeaways for Employers

Employers are well advised to keep the following in mind:

• Fixed term employment agreements contain a significant amount of potential risk as the use of a fixed term itself is susceptible to challenge. As such, fixed term employment agreements should only be used in narrow circumstances;
• A fixed term in an employment agreement will not likely be invalidated by an unlawful termination provision;
• A void termination provision may not automatically render void other aspects of an employment agreement that are unrelated to the termination provision; and
• It remains critical to ensure that termination provisions are reviewed by experienced legal counsel on a regular basis to ensure that they accord with recent case law and are clear and unambiguous, including in fixed term employment agreements.

The author would like to acknowledge the support and assistance of Jivan Maharaj , student at law.

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