A recent court decision at the Ontario Superior Court, Dufault v The Corporation of the Township of Ignace, 2024 ONSC 1029 (Dufault), may change the way that employers draft termination clauses in their employment agreements.
The Facts of the Case
Dufault was a motion for summary judgment for wrongful dismissal and damages for the duration of the fixed-term contract of the plaintiff, Dufault, with costs.
Dufault worked as a Youth Engagement Coordinator with the Township of Ignace (“Ignace” or “the Township”). She received a base salary as her salary. Dufault began her employment with Ignace on October 31, 2021. On November 24, 2022, she signed a fixed-term employment contract with Ignace, which stated that her employment would continue until December 31, 2024. On January 26, 2023, the Township dismissed Dufault without a reason, which was effective immediately, with 101 weeks remaining on the term of the contract. Ignace paid Dufault two weeks’ termination pay and continued her payment of benefits for two weeks (except for the pension plan, which was terminated effective immediately).
At trial, Dufault contended that the termination clauses of her employment contract with Ignace were illegal and unenforceable. She sought damages of 101 weeks’ base salary and benefits (minus the two weeks’ base salary and benefits already paid).
The Termination Clauses
There were two termination clauses in the employment contract between Dufault and Ignace: one for ‘with cause’ termination and another for ‘without cause’ termination. They state 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. 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 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. [Emphasis added.]
With Cause Clause
The Court held that an employment contract whose termination clauses include provisions to the effect that the employee can be terminated for cause, and that, upon such termination, the employer can withhold both termination and severance pay, is in contravention of the ESA and its regulations. This is because the ESA provides for the payment of such benefits.
Additionally, the definition of “for cause” dismissal of an employee in a termination clause cannot be more expansive than that found in the ESA, which are: “willful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer”. If an employment contract uses more expansive language or terms with different meanings than those in the ESA, such as “failure to perform services”, the termination clause of the employment contract may be unenforceable and void. For an employee to be terminated for just cause and without notice, the misconduct must be willful and serious. That is, it cannot be merely serious and careless or inadvertent; the intentionality is crucial to meeting the test for just cause under the ESA.
Without Cause Clause
Additionally, if a ‘without cause’ termination clause in an employment contract reduces the employee’s “regular wages” during the notice period, then it is in contravention of the ESA, which states that wages may not be reduced during the notice period. Pierce J. held in Dufault that ‘regular wages’ also includes vacation pay. In this case, the employment agreement provided for five days of paid leave annually to compensate for unpaid overtime hours worked for attendance at public and other meetings outside normal business hours, and sick days, which likely should have been included in ‘regular wages’ during the notice period. Employers should also take note that an employment contract cannot provide for the employer’s “sole discretion” to terminate an employee at any time. This, too, contravenes the ESA, which prohibits employers from terminating employees once they come back from leave or as reprisal for exercising or attempting to exercise a right under the ESA.
Damages
The Court held that the employee, who was terminated just over two months into a 25-month fixed term employment contract, was entitled to damages for all unpaid wages and benefits that would have accrued during the remaining time on the fixed-term contract (minus the two weeks’ termination and benefits pay that the employer provided in lieu of notice). Thus, the employee’s damages were for 101 weeks’ base salary and benefits.
Takeaways
There are two key takeaways from Dufault for employers.
The first takeaway is that termination ‘for cause’ clauses in employment agreements must not include language that goes beyond the termination without notice provisions of the ESA, such as “failure to perform services”. If a termination clause does go beyond the Act’s language, it may be unenforceable.
The second takeaway is that termination ‘without cause’ clauses in employment agreements may have to be reworked to comply with the ESA. These clauses must not reduce the ‘regular wages’ that an employee would have been paid during the notice period, and they should not expressly or impliedly state that the employer can terminate the agreement and the employee’s employment at the employer’s sole discretion. Employers should take note of this and ensure that their termination clauses include language that demonstrates their intent to comply with the standards and regulations under the ESA.
The Township sought permission to appeal this ruling to the Ontario Court of Appeal before a five judge panel, which the Court of Appeal denied on June 10, 2024.