In Covenoho v. Pendylum Ltd., 2017 ONCA 284, the Ontario Court of Appeal made a short and significant statement: where a termination clause will breach the Employment Standards Act (“ESA”) in the future, that clause is void and unenforceable – even if the ESA is not being breached at the time the employee is terminated.

Background

The employee was hired by Pendylum on a one-year fixed term contract. Just before the three month mark in her term, the employee was terminated without notice or payment in lieu of notice.

The employee brought a summary judgment motion, arguing the termination provision in the employment agreement was void as it did not comply with the ESA’s notice requirements. At first instance, the motion judge determined that the employee’s termination was valid, as she had been employed for less than three months and thus was not entitled to notice or payment in lieu under the ESA.

The employee appealed this decision.

Decision

The Ontario Court of Appeal reversed the lower court’s decision, basing its decision on the employment agreement’s termination provisions.

The employment agreement included the following clause:

2.1 The term of this Agreement will commence on the date of this Agreement and will continue in full force and effect unless the Agreement is terminated as follows:

(a) immediately by PENDYLUM providing written notice to you if you violate or fail to honor any of these provisions of this Agreement or fail to perform your duties as set out in Appendix A in a satisfactory manner as determined by PENDYLUM (known as Cause); or if the PENDYLUM Client to which you have been contracted terminate[s] its contract with PENDYLUM for your services; OR

(b) by either party providing written notice of at least two (2) weeks to the other.

2.2 In the event of termination, we will have no liability to you, save and except to pay any accrued and earned compensation up to and including the date of termination.

2.3 Upon termination or expiration of the agreement, you agree to return and/or destroy all confidential information and copies and sign an undertaking that all Confidential Information has been returned and/or destroyed.

In considering the above provisions, the Ontario Court of Appeal determined that the agreement “…. must be construed as if the [employee] had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void.”

The agreement would not provide adequate notice under the ESA for employees who had been employed longer than three years. As the ESA notice obligations were not met by the provision, the Court concluded the provision was void and unenforceable.

The court did not address the fact that the contract was for a one-year term, or that the notice provisions in the contract were greater than the notice required for employees of less than one year under the ESA. Under the Ontario ESA, an employee of more than three months but less than one year is only entitled to one week of notice, and an employee of between one year or more but less than three years is entitled to two weeks.

In calculating the damages owed, the court relied on Howard v. Benson Group Inc., 2016 ONCA 256 to conclude that “[i]n the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term and that obligation will not be subject to mitigation.”

As the termination provisions were of no force or effect, the employee was entitled to the balance of the value of her one-year term, being $56,000, without mitigation.

The Takeaway

This decision sets a new high water mark for the standard to be met by termination clauses.

As an appellate decision, it is binding in Ontario and will be given considerable weight in lower courts in other provinces as well, at least until there is another appellate level decision dealing with the same topic. It furthers the ongoing trend toward not upholding termination clauses unless they are extremely clearly drafted and in accordance with minimum standards legislation.

It is important to remember that employment standards laws are intended as a floor of rights. Employment agreements cannot offer less than what an employee is entitled to under the minimum standard set by employment standards legislation.

When creating employment contracts or agreements, be careful to ensure that they do not fall below the thresholds set by provincial legislation. This includes “future proofing” for any notice provisions that would be owed to a longer-term employee, even in a term contract. A provision that violates employment standards legislation could cause the provision, or even the entire agreement, to be disregarded by a court. We recommend you seek legal assistance with drafting your contracts if you are unsure what the thresholds are, or whether you can include a provision in an employment agreement.