The Elephant in the Termination Clause
The Ontario Court of Appeal released its decision for Dufault v. Ignace on December 19, 2024, but opted not to address a key aspect of the lower court’s decision regarding the unenforceability of an employer’s termination clause, ultimately choosing to leave that determination for another day.
This leaves more questions than answers for employers in Ontario (and potentially across Canada), and further reaffirms the importance of ensuring employment contracts are carefully drafted to comply with minimum employment standards obligations.
BACKGROUND FACTS
In 2024, an employee brought a claim for wrongful dismissal, alleging that the termination clause in their employment contract was illegal and unenforceable. The Employer took the position that the wording of the agreement was clear and that it had paid the plaintiff all damages to which they were entitled under the Employment Standards Act, O. Reg. 288/01 (“ESA”).
The clause itself is reproduced below:
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.
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 the Employment Standards Act, 2000 and will pay all other required accrued benefits or payments required by that Act.
(iii) all payments provided under this paragraph will be subject to all deductions required under the Township’s policies and by-laws.
(iv) any further entitlements to salary continuation terminate immediately upon the death of the Employee.
(v) such payment and benefits contributions will be calculated on the basis of the Employee’s salary and benefits at the time of their termination.
If the employee was right that the employment contract was illegal and unenforceable, then their entitlement to notice would shift considerably from $2,884.61 to $157,071.57.
LOWER COURT DECISION
The lower court found that the termination clause was unenforceable for essentially two reasons:
A. The “For Cause” Clause
The court ruled that the “for cause” provision contravened the ESA because it permitted dismissal for reasons that were broader and less stringent than the ESA’s requirement of “wilful misconduct.” Under s. 2(1)3 of Ontario Regulation 288/01, “wilful misconduct” must involve deliberate or intentional wrongdoing, where the employee is fully aware that their actions constitute misconduct. The contract’s language, including terms like “failure to perform services,” failed to meet this high standard. This phrase suggested a standard akin to negligence or poor performance, which may warrant dismissal under common law but does not meet the ESA’s narrower criteria for withholding statutory notice or termination pay. The clause also lacked essential qualifiers such as “non-trivial” misconduct, further failing to align with ESA standards.
B. The “Without Cause” Clause
The “without cause” termination clause was similarly found to be non-compliant with the ESA. It stipulated that termination pay would be limited to the employee’s base salary, omitting other entitlements such as vacation pay, sick days, overtime, and other regular wages as defined under s. 60 of the ESA. Additionally, the clause excluded references to accrued benefits like sick leave and vacation pay during the notice period, which are mandatory under the ESA. The provision also granted the employer “sole discretion” to terminate the employee’s contract “at any time,” a phrase that misrepresented the employer’s legal obligations. This language disregarded ESA protections, such as prohibiting termination during protected leaves (s. 53) or reprisal for exercising rights under the Act (s. 74). These omissions and misstatements collectively rendered the “without cause” clause unenforceable as it failed to uphold the minimum standards established by the ESA.
THE APPEAL
The Employer appealed the decision, and the appeal was closely watched by employment lawyers across Canada, primarily as a result of the lower court’s findings about the inclusion of the phrase “at any time” in the without cause provision. This language appears frequently in employment contract termination clauses, and if upheld, the court’s decision could have wide-ranging impacts on employers and their liabilities to employees.
As noted above, the Court of Appeal released its decision on December 19, 2024, and found that:
- The “for cause” termination clause was unenforceable because it contravened the ESA by allowing dismissal for reasons less stringent than the "wilful misconduct" standard.
- Following the Waksdale v. Swegon precedent, the invalidity of the "for cause" clause rendered all termination provisions unenforceable.
Notably, the Court opted specifically not to address the “without cause” clause in the termination clause, noting that such issues should be decided in appeals directly impacting the case's outcome, which was unnecessary here since the termination provisions were already invalidated.
The Court of Appeal’s deliberate choice not to rule on the enforceability of the “without cause” clause leaves a significant gap in the legal landscape for employment law in Ontario, but reflects a cautious approach, ensuring future rulings can consider the issue directly when it would materially affect the case’s outcome. However, this restraint creates ongoing uncertainty for employers who may use similar language in employment contracts. Until clarified by a future decision, the enforceability of such “without cause” clauses allowing for termination “at any time” remains a contentious and unsettled area of law, potentially exposing employers to liabilities.
As a final note, it appears the employer in Dufault has opted to apply for leave to appeal with the Supreme Court of Canada. We will continue to watch this case for any further developments.
KEY TAKEAWAYS
The decision in Dufault underscores two essential lessons:
- Courts will interpret termination clauses as a unified scheme rather than in isolation. If one clause fails to meet ESA standards, the entire termination framework may be rendered unenforceable.
- The use of broad or vague language—such as granting employers "sole discretion" or employing overly expansive definitions of "cause"—can potentially lead to invalidation. It is therefore crucial to carefully review employment contracts, particularly termination provisions, before employment begins and also when it ends. In that regard, employers should take proactive measures to ensure their contracts explicitly adhere to statutory standards, including unambiguous language and the inclusion of all mandatory entitlements, such as vacation pay and benefits continuation during the notice period.
The information provided here does not constitute legal advice and is based on details available at time of writing. Perspectives and interpretations around this information will vary depending on the individual circumstances to which they may apply. Consult legal counsel for information and advice relevant to your individual circumstances.
