Clauses for Termination for “Cause” Within Employment Agreements

Before commencing employment new employees are often asked to sign an employment contract as a condition of starting in that role. This contract may contain a termination clause that outlines the circumstances of when the employer can terminate the relationship and what the employee’s entitlements would be if that happens. In Ontario, if there is no termination clause in the employment contract, the employee is entitled to reasonable common law notice, since there is nothing limiting their notice period to the statutory minimums under the Employment Standards Act, 2000 (“ESA”).

Reasonable common law notice is often more generous than the week per year of service provided by the ESA. Because of this, the termination clauses are most often drafted in favour of the employer to limit the rights of the employee upon termination.

It is also important to note that an employer and employee cannot contract for less than what the ESA provides for since one of the objectives of the ESA is to protect the interests of employees. Employers are required to comply with certain minimum standards, such as notice periods for termination.

The Ontario Court of Appeal set out requirements that must be met by employers in Wood v. Fred Deely Imports Ltd., where it was essentially held that if the language of a termination clause is unclear or if it can be interpreted in multiple ways, the court should adopt the interpretation that is most favourable to the employee.

The following principles were determined in additional cases relating to termination clauses and must also be followed when drafting employment contracts:

1. If the wording of the employment contract allows for potential ESA violations, then the termination clause is void and the employee is entitled to a reasonable common law notice period;

2. The provision must be clear in specifying that the notice period is not a reasonable common law notice period;

3. If the provision violates the ESA (i.e., discontinuance of benefits during the notice period), the entire provision of the contract is void and the employee will be entitled to reasonable common law notice; and

4. A violation of the ESA renders a termination clause void. A severability clause cannot remove the violation, because the entire contract is void.

Arguments regarding the validity of termination clauses and contracts are often brought by lawyers, since they can be very complex, and a contract must be read and interpreted as a whole rather than clause by clause.

A termination clause regarding termination for “just cause” was the point of contention in Khashaba v. Procom Consultants Group Ltd., 2018 ONSC 7617. Justice Brown held that the clause allowing the employer to terminate an employee without notice for “just cause” did not comply with the provisions of the Ontario Employment Standards Act, 2000.

The relevant termination provisions read as such (emphasis added):

5(b) Termination for Cause: Procom may, at its option, terminate your employment immediately for cause, without prior written notice or compensation of any nature. For these purposes, “cause” means any grounds at common law for which an employer is entitled to dismiss an employee summarily without notice or compensation in lieu of notice.

5(c) Termination without Cause: Notwithstanding the fixed Term of this Agreement, Procom may terminate your employment without cause at any time by providing you with only the minimum amount of notice of termination or pay in lieu thereof (at the Company’s sole discretion, in any combination), minimum benefits continuation (if applicable), and minimum severance pay (if applicable), as required by the Employment Standards Act, 2000, as well as accrued wages and vacation pay up to and including the date of termination. In no event will you receive less than your minimum entitlements under the Employment Standards Act, 2000. If a greater entitlement is required under the Employment Standards Act, 2000 than this provision grants to you, your entitlements shall automatically be increased to satisfy only the minimum entitlements required by the Employment Standards Act, 2000 on the termination of your employment. You understand and agree that the entitlements set out in this paragraph will constitute your full, exclusive and final entitlements to notice or pay in lieu of notice, severance pay (if applicable), and benefits continuation (if applicable), including in the event of a constructive dismissal and including any entitlements to common law notice and by your acceptance of this Agreement waive any further other claim at common law relating to such termination.

Justice Brown held that the termination for cause provision was invalid since the standards for “just cause” dismissals are significantly different between the common law and legislation. Specifically, the ESA has a much higher threshold. An assessment regarding the subjective intent of the employee is required (i.e., “was the employee misbehaving on purpose?”), whereas, the common law standard for “just cause” is assessed by an objective standard. These dismissals may be found on the basis of prolonged incompetence, without any intentional misconduct, regardless of if the employee was intentionally incompetent.

This case echoes previously cases who have found that the threshold for cause under the ESA to be different and higher than the common law threshold (see for example, Plester v Polyone Canada Inc 2011 ONSC 6068(CanLII) and Oosterbosch v FAG Aerospace Inc, 2011 ONSC 1538(CanLII)). It follows that contracting into the lower standard of cause under the common law could be a violation of the employee’s rights under the ESA, as an employee would be denied his/her ESA entitlements even if the employer cannot meet the higher threshold for cause under the ESA.

Although the termination for cause provision in the above case was invalid, the contract had a severability clause and the termination without cause provision was enforceable. Therefore the employee was entitled to the statutory minimum notice period. Unfortunately, since the employment relationship was less than three months, he was not entitled to anything under the ESA.

Whether you are an employer or an employee, all parties should have their employment contracts reviewed by an employment lawyer. The law is constantly evolving and changing, and as such, a clause that was valid five years ago may no longer be valid today.

If you have any questions about an employment contract, contract Monkhouse Law for a consultation.

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