Termination Clause Overhaul: Adapting to Evolving Legal Standards

A recent decision from the Ontario Superior Court of Justice (“ONSC” or the “Court”), Dufault v. The Corporation of the Township of Ignace [Dufault], has raised concerns among Canadian employers, prompting many to update their employment agreements or else face the risk owing significantly more termination pay than they had bargained for. In an increasingly employee-friendly legal landscape, the decision reminds employers that if they wish to limit an employee’s termination entitlements to the minimum standards, they must do so with precision and ensure strict compliance with employment standards legislation. While the decision poses challenges for businesses, it also offers organizations a golden opportunity to elevate their HR practices.

Navigating the Legal Landscape

In all provinces and territories in Canada (except for Quebec), employees are by default entitled to “reasonable notice” of termination or pay in lieu of notice. This right can only be displaced by clear contractual terms limiting an employee’s entitlements upon termination. However, if those terms deprive the employee of their minimum entitlements under employment standards legislation, they will be unenforceable, and the employee can then claim the often significantly higher entitlements available under the common law.

Understanding the Dufault Decision

In Dufault, the employee signed a fixed-term employment agreement containing termination clauses. The Court deemed these clauses unenforceable because they allowed the employer to dismiss the employee without cause “at any time” and at the employer’s “sole discretion”, which violated the Employment Standards Act, 2000 (“ESA”). Specifically, the Court held that such wording contravened the ESA’s prohibitions against dismissing employees at the conclusion of a leave of absence or in reprisal for attempting to exercise their rights under the ESA. 

The termination clauses also permitted the employer to dismiss the employee without notice or pay in lieu of notice “for cause”, which the agreement defined to include the employee’s failure to perform services. The Court determined that this standard did not meet the threshold of “wilful misconduct” required under the ESA for an employee to forfeit their minimum statutory entitlements.

Consequently, as the Court found the termination clauses in the employee’s fixed term contract invalid, the employer was obligated to pay out the balance of the remaining term to the employee, amounting to 101 weeks of the employee’s base salary and benefits.

Impact and Opportunity for Canadian Employers

This Dufault decision has significant implications for many organizations across Ontario and potentially beyond. These organizations now face the task of reviewing and revising their employment agreements to ensure they reflect the current state of the law. However, as the saying goes, “When one door closes, another one opens.” While the decision presents challenges for businesses, it also provides an opportunity for proactive measures to minimize the risk of future challenges to their employment agreements. In addition to revising their employment agreements, Canadian organizations can use this moment to revamp their workplace policies, incentive compensation plans, and other pertinent documents. By doing so, they can minimize risk, enhance transparency regarding termination entitlements, and take their employment practices to the next level.

CanadianSME Magazine will be hosting a webinar, in partnership with Williams HR Law LLP, on the Dufault decision on May 6th at 1 pm ET, where we will delve into the implications of this new Dufault decision and offer practical strategies for employers to implement legally enforceable employment agreements and seize the opportunity to level up their workplace policies. Register here