Ontario Court of Appeal Clarifies Principles Regarding Termination Clauses

Over the past several years, Ontario courts have reached inconsistent conclusions in a number of reported cases as to whether employment contracts that permit termination of employment by the employer “at any time” or “for any reason” violate the Employment Standards Act, 2000 (the “ESA”). The Court of Appeal has now determined in two cases heard together on appeal, Baker v. Van Dolder’s Home Team Inc. and Li v. Wayfair Canada ULC, that such language does not invalidate a termination clause that otherwise complies with the ESA.

This represents a more practical, balanced approach to the interpretation of employment termination clauses in Ontario.

Background

In Baker v. Van Dolder’s, both the “for just cause” and “without just cause” language in the employment agreement were found by the motions judge to violate the ESA. The “without just cause” termination clause permitted termination, “at any time, without just cause, upon providing [the employee] with only the minimum notice, or payment in lieu of notice and, if applicable, severance pay, required by the Employment Standards Act.” The motions judge found termination “at any time” to be inconsistent with provisions within the ESA that prohibit termination at certain times, such as following a protected leave of absence or as a form of reprisal.

The agreement also stated that employment could be terminated “at any time for just cause, without prior notice or compensation of any kind, except any minimum compensation or entitlements prescribed by the Employment Standards Act.” Just cause was defined to include a number of items including poor performance, dishonesty relating to employment, and any other conduct that would constitute just cause at common law. The motions judge found this clause violated the ESA, which requires the employee be guilty of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” before they are denied notice or severance under the ESA. The motions judge found that the reference to ESA minimums did not save the clause because the agreement failed to appropriately alert the employee to the differences between the contractual standard of just cause and the minimum standards of the ESA.

In Li v. Wayfair Canada ULC, the employment agreement permitted termination of employment for cause “at any time for Cause without notice, pay in lieu of notice, severance, benefits continuance or other compensation or damages of any kind, unless expressly required by the ESA in which case only the minimum statutory entitlements will be provided.” The term “Cause” in that agreement was defined in reference to the ESA standard of “wilful misconduct” (as excerpted above), as opposed to just cause at common law. The without cause termination language provided that the employer “may terminate [the employee’s] employment at any time and for any reason” by providing the minimum notice, severance, benefits continuation and other entitlements under the ESA. Reading the agreement as a whole, the motions judge found both clauses complied with the ESA, as they sought only to limit the employee’s rights upon termination to the ESA minimums.

Court of Appeal’s Decision

The Court of Appeal acknowledged that employee vulnerability and the remedial nature of the ESA favour an interpretation of termination provisions that encourages employers to draft agreements that clearly comply with the ESA. It noted that, at the same time, the modern approach to contract interpretation requires a practical, common sense and contextual approach to determining the objective intent of the parties expressed in the language of their agreement. The Court rejected a “magic words” approach, where the use of certain words, considered in isolation, will determine the meaning of a provision. It also noted that ambiguity should only be found where there are two or more reasonable but differing interpretations possible within the context of the entire contract, not merely where there are multiple potential or hypothetical interpretations.

Based on this approach, with respect to the “without cause” termination provisions in both cases , the Court held that language permitting termination “at any time” and/or “for any reason” does not violate the ESA. Such language reflects an intention that a termination without cause will be valid irrespective of when it occurs, consistent with an employer’s inherent right to terminate employment even absent just cause or a specific business reason. Those phrases only appeared to suggest termination in a manner that breaches the ESA if they were read literally while ignoring the context in which they are found. Moreover, neither party to either agreement could reasonably be taken to have intended that “at any time or for any reason” would assert the employer’s right to terminate employment in violation of ESA protections or similar remedial legislation that protects employees from termination at certain times or under certain circumstances. The Court noted it would offend common sense were the contract interpreted as expressing an intention to engage in unlawful behaviour with potentially severe consequences for the employer and would also conflict with the multiple express references in both agreements to complying with the minimum ESA standards.

The Court also found the “for cause” termination provision in Li v. Wayfair was enforceable, based on the above and on the repeated assertion in the language that the employee’s ESA rights would be respected. The “for any reason” language did not change the result; it merely expressed an intent that the employer could terminate regardless of the reason and/or without having to give an employee a specific reason. The Court noted that there are numerous decisions in Ontario and at the Supreme Court of Canada upholding the validity of employment contracts permitting termination “at any time” or “for any reason”.

Likewise, the Court of Appeal found the “for cause” termination clause in Baker v. Van Dolder’s complied with the ESA. Although that agreement defined “just cause” according to common law and contractually-specified terms (as opposed to the ESA ‘wilful misconduct’ standard), it nonetheless ensured the employee would be entitled to “minimum compensation or entitlements prescribed by the Employment Standards Act.”

Implications for Employers

In particular, Baker v. Van Dolder’s helpfully clarifies several points for employers:

• A termination clause that otherwise complies with the ESA is not invalid merely because it states that termination may occur “at any time” or “for any reason”.
• Courts will not use a “magic words” approach to interpreting employment agreements and instead will consider the context to ascertain the objective intent of the parties.
• Termination clauses in employment agreements are not necessarily void merely because they refer to termination without notice for “just cause”, provided that they preserve the employee’s entitlement to minimum ESA standards.

While this is a welcome development for Ontario employers, careful drafting of employment contracts – and particularly, termination provisions – remains essential to ensure enforceability.

For information on how this decision affects your business or employment agreements, please contact any member of our Employment, Pensions and Executive Compensation Group.