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In Ontario, termination clauses in employment contracts are under constant scrutiny. While they serve as a crucial tool for employers to manage termination costs, they must be drafted with a fair degree of particularity, as the failure to do so may render a termination clause unenforceable, exposing employers to common law notice obligations that far exceed the statutory minimums. This article examines recent case law developments, common pitfalls in termination clauses, and best practices for employers to mitigate legal risks.

The courts in Ontario have consistently found that any portion of a termination provision that violates the entitlements set out in the Ontario Employment Standards Act, 2000 (“ESAâ€�) will render the entire provision unenforceable. The recent decision of the Ontario Superior Court of Justice in Baker v. Van Dolder’s Homes Team Inc.¹, reinforces this principle. This case serves as a reminder that even minor inconsistencies between a termination clause and the ESA can lead to the invalidation of the entire provision. It represents the latest in a series of rulings addressing the enforceability of termination provisions.

In Baker, the employment contract contained both without cause and just cause termination clauses, both of which were challenged for non-compliance with the ESA. The Court found the termination provisions unenforceable for two primary reasons:

• The “without causeâ€� provision incorrectly stated that the employer could terminate employment “at any timeâ€�, a misrepresentation of the ESA, which prohibits termination in certain circumstances, such as reprisals or post-leave dismissals. Even though the contract later affirmed ESA compliance, the Court held that general language referencing the ESA, commonly known as a “saving provisionâ€� does not cure a clause that’s otherwise unenforceable.
• The “for causeâ€� provision listed misconduct, such as poor performance and breach of company policy as grounds for dismissal without notice or severance. The Court ruled that this did not meet the ESA’s wilful misconduct threshold.

Applying a previous ruling from the case of Perretta v. Rand A Technology Corporation ², the Court in Baker held that because the for-cause language was invalid, the entire termination provision, including the without-cause clause, was unenforceable. As a result, the employer was liable for common law reasonable notice, and a further hearing was scheduled to determine damages.

The Baker decision highlights the continued judicial emphasis on strict ESA compliance and reinforces the principle that a single defect in a termination clause can lead to significant financial consequences for employers. It follows the judicial wave of strict scrutiny of termination provisions, a trend reaffirmed last year in the 2024 Superior Court decisions in Dufault v. The Corporation of Township of Ignace³ and Wilds v. 1959612 Ontario Inc.⁴, which provided critical insights into the enforceability of termination clauses. 

In Dufault, the plaintiff was employed pursuant to a fixed-term contract that allowed the employer to terminate employment “at the employer’s sole discretion and without causeâ€� upon providing written notice. After being terminated in January 2023, the plaintiff challenged the termination clause, arguing that it was unenforceable as it violated the ESA by:

• Allowing the employer to withhold termination and severance pay in some circumstances.
• Setting a “for causeâ€� threshold lower than the ESA’s wilful misconduct standard;
• Excluding wages and benefits beyond base salary, contradicting ESA entitlements; and
• Conferring unfettered discretion on the employer to terminate employment.

The Court in Dufault found that once any portion of a termination clause violates the ESA, the entire clause becomes unenforceable. Dufault thus reaffirms that courts will not “blue pencilâ€� non-compliant contractual language to preserve partial validity.

In Wilds, the plaintiff was dismissed after 4.5 months of employment and was offered severance pay only upon signing a full and final release. The plaintiff refused and brought a wrongful dismissal claim, arguing that the termination provisions were contrary to the ESA.

The court identified multiple deficiencies in the termination provision, including:

• A “for causeâ€� provision that imposed a lower threshold than the ESA’s wilful misconduct standard;
• A without cause provision that only provided base salary and excluded vacation pay, bonuses, and other entitlements, which violated ESA requirements for termination pay; and
• An invalid saving provision.

From these cases, several reasons have consistently emerged for why termination clauses have been deemed unenforceable:

1. Ambiguity and Contradictory Language: Ambiguity in a termination provision will usually be interpreted in favour of the employee. Courts have repeatedly invalidated clauses that are vague, contradictory, or that conflict with ESA requirements.
2. Failure to provide for ESA Severance Pay: For employees with five or more years of service and whose employer has a payroll over $2.5 million, severance pay must be explicitly included⁵. Failure to do so may render a termination clause unenforceable.
3. Exclusion of Statutory Benefits During Notice Period: The ESA requires continuation of benefits during the statutory notice period. If a termination clause does not explicitly provide for the continuation of statutory benefits, courts may rule that it falls below ESA minimum entitlements.
4. Overly Broad “For Causeâ€� Termination Provisions: The ESA defines wilful misconduct as the only standard that permits termination without notice. Termination provisions that define “causeâ€� more broadly, such as including poor performance, contravene the ESA and may render the entire termination provision unenforceable.
5. Employer Discretionary Termination Language: As established in Dufault, termination provisions that grant an employer unilateral and absolute discretion to terminate the employment relationship are at risk of being struck down. 
6. Reliance on Saving Provisions: Courts have held that saving provisions (clauses that state the contract should be read to comply with the ESA) cannot rectify an otherwise non-compliant termination clause. Employers cannot contract out of the ESA, even with language stating that termination will comply with statutory minimums. 

With the above reasons in mind, employers should be mindful of drafting termination clauses that are precise, ESA compliant and unambiguous. In view of the ever evolving (and consistent) challenge to the enforceability of termination clauses, employment contracts should be reviewed regularly and updated where necessary, in consultation with and on the advice of legal counsel . Human Resources professionals and managers should receive regular training on termination provisions to ensure proper execution as misapplication of contract terms can expose employers to wrongful dismissal claims.