The Pen Is Mightier Than the Sword: Two Recent Decisions Highlight the Importance of Drafting Enforceable Employment Contracts

By: Mark Omenugha

While drafting an employment contract may seem like a relatively straightforward task, that is not in fact the case. When employment disputes arise, an employee’s legal entitlements will often hinge on the enforceability of the relevant clauses in an employment agreement. In recent years, the Ontario Courts have released a number of “employee friendly” decisions that have created new avenues by which to attack a termination clause, meaning that an enforceable employment contract can be rendered unenforceable overnight. Two recent Ontario Superior Court of Justice decisions illustrate the importance of getting legal advice before entering into a new employment agreement. In fact, many employers have learned the hard way that failing to draft an enforceable employment contract can have disastrous (and expensive) consequences.

Recent Jurisprudence

In De Castro v. Arista Homes Limited, 2024 ONSC 1035, the Court was required to consider, among other things, whether a termination clause in an employment contract was enforceable. Since the Ontario Court of Appeal’s decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391, it is now firmly established that, if an employment contract contains a clause that contravenes the statutory minimums prescribed by the Employment Standards Act, 2000, (“ESA”), then all termination provisions that same contract will be found to be unenforceable and the employee will be entitled to common law notice.

One of the key issues in dispute was the enforceability of the “for cause” termination provision in the contract. The plaintiff’s employment contract stated as follows:

If you are terminated for Cause or you have been guilty of wilful misconduct, disobedience, breach of Employment Agreement or wilful neglect of duty that is not trivial and has not been condoned by ARISTA, then ARISTA will be under no further obligation to provide you with pay in lieu of reasonable notice or severance pay whether under statute or common law. For the purposes of this Agreement “Cause” shall include your involvement in any act or omission which would in law permit ARISTA to, without notice or payment in lieu of notice, terminate your employment.  [Emphasis added].

The Court ultimately found that this provision was void and unenforceable at law, because the bolded portions of that clause (i.e. the “for cause” provisions) permitted the employer to terminate the employee without notice on grounds that are much broader than the circumstances prescribed under the ESA and its corresponding regulations. Alternatively, the court found that, at a minimum, the provision is ambiguous and should be construed against the employer who drafted the contract.

Another recent decision illustrates the importance of having enforceable termination provisions in a contract in order to avoid a potentially costly damages award. In Dufault v. The Corporation of the Township of Ignace, the Court was required to interpret the enforceability of a fixed term employment contract. In that case, the plaintiff moved for a summary judgement for wrongful dismissal and damages for the remainder of the term set out in the fixed-term employment contract. The Court held that the termination clauses in the contract contravened the ESA and were not enforceable and it awarded over $150,000 in damages to the plaintiff.

The relevant termination provisions in the employment agreement read as follows:

“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 … 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[.]

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 …”

The Court held that the termination provisions were unenforceable for four separate reasons:

• First, court followed Waksdale and held that the insertion of a “for cause” provision contravened the ESA, in that it purported to allow the employer to terminate the employee without notice in circumstances that are much broader than those prescribed by the ESA (i.e. in circumstances where an employee has been [found] “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.”
• Second, the “without cause” provision also contravenes the ESA, since it states that the Employee is only required to pay the employee’s “base salary” as opposed to all “regular wages” as required by the section 60 of the ESA. The clause also failed to explicitly reference vacation pay, sick pay, and other forms of compensation which form part of the employee’s regular wages.
• Third (and perhaps most notably), the termination provisions were found to be unenforceable because the language in the “without cause” provision grants the employer the right to terminate the employee without cause at “its sole discretion” and “at any time.” The Court held that this wording violated the ESA, which expressly prohibits an employer from terminating an employee at certain periods of time. For example, the ESA prohibits an employer from terminating an employee upon the conclusion of a statutory leave (section 53) or as a reprisal for exercising a right under the ESA (section 73).

Key Takeaways

These recent decisions highlight the importance of drafting an enforceable employment agreement, regardless of whether the contract is for a fixed or an indefinite term. In both decisions, the courts found new ways to challenge the enforceability of termination provisions, but those pitfalls could have been easily avoided if the contracts in question contained language that expressly complied with the ESA. The old adage “less is more” clearly applies here, and these decisions should serve as warning to both employers and employees about the importance of seeking legal advice to assist with the review or drafting of an employment contract.