Beware the Frightfully Unenforceable Termination Clause

© Daniel Wilband, 2024-10-17

The controversial April 2024 decision of the Ontario Superior Court of Justice in Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029 (“Dufault”) has been the subject of much discussion and is one of this year’s worst horror stories for employers. It reveals the need for employers to constantly review their employment agreements, to ensure they remain enforceable and compliant with the ever-shifting case law in this area.

In Dufault, the Ontario Court found the termination provisions of a fixed-term contract were unenforceable. Among other things, the Court took issue with some ostensibly standard and frequently used contractual terms. If upheld on appeal, this decision could affect the way employment agreements are drafted across Canada going forward.

A short summary of facts

Ms. Dufault was an employee of the Corporation of the Township of Ignace under a “fixed-term” contract. In November 2022, she signed the contract, agreeing that her employment would continue for just over two years, and that it would end on December 31, 2024. The contract contained a termination clause that claimed to allow the Township to terminate the employment at any time, without cause, if the Township provided Ms. Dufault with an agreed-upon amount of notice or pay in lieu of notice. The amount agreed upon was two weeks’ base salary per year of service, up to a maximum of four months’ salary, or the amount required by the Ontario Employment Standards Act, whichever was greater.

With 101 weeks remaining in the contractual term, on January 26, 2023, the Township terminated her employment without cause. The Township paid Ms. Dufault two weeks’ termination pay and continued her benefits as per the contract. Ms. Dufault brought a claim alleging wrongful dismissal. She argued the termination provisions in her agreement were unenforceable.

Ms. Dufault sought damages in the full amount remaining in the fixed-term contract, that is, 101 weeks’ pay and benefits (less damages already paid), for a total award of $157,071.57. The Township responded by arguing that the contract’s language was clear and enforceable, and that the Plaintiff had already been paid any damages to which she was entitled under the Employment Standards Act.

The relevant termination provisions in Ms. Dufault’s employment agreement were as follows (emphasis added):

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. [Emphasis added]

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, 2000 whichever 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 theEmployment Standards Act, 2000 and will pay all other required accrued benefits or payments required by that Act.

The Court’s Decision

The Court found the termination clause was unenforceable for three separate reasons. We’ll summarize each of those reasons below.

First, the Court held there was a problem with the ‘for cause’ part of the clause. Following recent binding case law in Ontario (in a case called Waksdale), the judge observed the clause failed to distinguish between the ‘just cause’ standard for termination without ‘common law’ notice, and the higher standard of ‘wilful misconduct’ for termination without any notice under the Employment Standards Act. For that reason alone, the entire termination clause was not enforceable.

On this point, we note the specific language of the relevant sections in the Ontario legislation is significantly different from that in New Brunswick. However, the above reasoning does apply in some other provinces, such as Nova Scotia. More broadly, the above ruling shows that if any part of a termination clause is problematic, the entire termination clause could be struck down, regardless of how the employee is in fact terminated.

Second, the “without cause” provision stated that the Township would only continue to pay Ms. Dufault’s “base salary” (rather than all potential payments otherwise owed), throughout the contractual notice period. The Court held that this language violated the ESA because an employee is entitled to all her “regular wages” during the statutory notice period. This includes more than just base salary—it also includes vacation pay, as well as any commissions or bonuses.

This second finding is relevant in New Brunswick. Under the New Brunswick legislation, an employee is owed notice or pay in lieu, in an amount “amount equal to the pay the employee would have earned during the notice period”, which includes vacation pay, benefits, and other forms of remuneration. Therefore, if a contract only provides for “base salary” or “wages” during the notice period, it will run afoul of the ESA and will be found invalid.

The most novel and frightening holding for employers in Dufault is the third one. The third reason the above clause was unenforceable was that its "without cause" provision purported to allow the employer to terminate without cause at its “sole discretion" and “at any time". The Court held that this too violated the ESA, which in fact prohibits an employer from terminating an employee at certain times, such as at the conclusion of an employee’s leave or in reprisal for attempting to exercise a right under the Act (s. 74). The right of the employer to dismiss was not as absolute as it claimed, and so the termination clause’s language was invalid and unenforceable.(Similar provisions are contained in the New Brunswick ESA, for example those prohibiting ‘unfair employer action’ at s. 28.)

The reality is that the contract’s language in Dufault is commonplace in employment contracts throughout Canada. The Dufault ruling creates a risk that many once-standard termination clauses— using the language of “sole discretion” or “at any time”—will be found unenforceable, including in New Brunswick and elsewhere.

In the end, the Court held that Ms. Dufault was wrongfully dismissed. Since there was no enforceable termination clause, it awarded her damages based on the remaining 101 weeks of the term of her contract. In accordance with existing case law, she was entitled to receive all pay and benefits for the whole unexpired term of the fixed term of the contract, without a duty to mitigate.

Lessons for employers:

1. Employers should regularly review their employment contracts with legal counsel. In recent years, the law in this area has evolved rapidly, and employers should ensure all clauses are compliant with the most recent cases. If the need to adjust contractual language arises, legal counsel can assist in finding an effective way to do so.

2. If any part of a termination clause is problematic, the entire clause will likely be declared invalid by a Court—both the ‘with cause’ and ‘without cause’ provisions.

3. Any provision that states an employer may terminate “at any time” or at its “sole discretion” could now be a problem. But may still be enforceable if there is additional contractual language demonstrating a clear intent to comply with the ESA.

4. “Fixed-term” contracts can be especially risky. If a termination clause found therein is found unenforceable, and the employee is terminated early, the employer will likely be liable for the full value of the unexpired term of the contract. This is true even if the employee finds a new job quickly.

The Township in Dufault has appealed the decision to the Court of Appeal for Ontario. The appeal has not yet been decided, but the employer’s request to convene a panel of five judges to overturn the seminal Waksdale decision was refused in June 2024. It remains to be seen how many parts of this nightmarish scene for the employer Township are upheld on appeal.