“For cause” or not “for cause”? The Importance of ESA Compliant Termination Provisions in Employment Contracts

In Dufault v The Corporation of the Township of Ignace, 2024 ONSC 1029, the Ontario Superior Court of Justice reminds us about the importance of ensuring employment contracts have termination language that complies with the Employment Standard Act, 2000 (the “ESA”).

In this summary judgement, a terminated Plaintiff asserted that she was owed damages for the entirety of her fixed-term contract. The Plaintiff was hired in 2021, but in November 2022 she was given a new contract by her employer, the Defendant. This new contract provided that her employment would be on a fixed term, ending on December 31, 2024. However, in late January 2023, the Defendant terminated the Plaintiff without cause.

 The Termination Language in Question

As the facts were not in question, this decision came down to an analysis of the termination language in the Plaintiff’s fixed term contract. There are two principles of employment law that were central to this decision:

      1. Where the language in atermination provision does not comply with the ESA, the termination clause is null and void. This principal dates back to the Supreme Court’s decision in Machtinger in 1992.
      2. Where a fixed-term contract is terminated without cause before the end of the term, and there is no termination language to terminate the employee early, the terminated employee is entitled to their wages and benefits for the remaining term of the contract. This principal was established in the Ontario Court of Appeal’s decision in Howard in 2016.

The termination language in this employment contract stated that the Defendant could terminate the Plaintiff “for cause” without any notice or pay.

It further provided language that the Defendant could terminate the Plaintiff on a without cause basis. In this case, the Defendant would pay the Plaintiff the base wages they would earn in a period of two weeks for each full year of service, or whatever period was required by the ESA.

At face value, it may appear as though that termination language complies with the ESA. The main problem, however, was the use of the words “for cause”.

 “For Cause” Is Not in the ESA

In Ontario employment law, almost all employment contracts must comply with the ESA. Where contracts comply with the ESA, terminated employees are only entitled to what is provided for under the act. However, where employment contracts fail to comply with the ESA the courts apply the principles of Common Law, where employees are entitled to damages that are much more generous than what the ESA provides for.

In Common Law, there are “for cause” and “without cause” terminations. As the names suggest, “for cause” refers to a termination where the employee gave the employer a reason to terminate them, and “without cause” refers to where an employer terminates an employee for other reasons.

The issue for the Defendant employer in this decision, was that the words “for cause” are not found in the ESA. Under the ESA, an employer does not have to give their employee their proper notice of termination where the employee is guilty of “willful misconduct, disobedience, or willful neglect.” While the Defendant attempted to argue that “for cause” had the same meaning, the Court noted that “for cause” was broader than the language in the ESA. Because of this, the termination clause did not comply with the ESA, which meant the termination clause was unenforceable.

Fixed Term Contracts Can Be Ended Early, Where Termination Language is Enforceable

A finding that one part of a termination clause is unenforceable means that the entire termination clause is unenforceable. For example, if an employee is terminated without cause, and the without cause termination language in their contract complies with the ESA, the entire termination language is unenforceable if another part of the termination language breaches the act. Because of this, when the Superior Court found that the “for cause” termination language was of no effect, the “without cause” language was automatically of no effect.

Regardless, the Court interpreted the “without cause” language and found that it also breached the ESA. This was because the language in the termination provision only provided for “base wages” where the ESA entitles terminated employees to “regular wages”, which includes things like benefits or commission pay. Therefore, even though this Defendant employer had language permitting them to terminate the Plaintiff before the end of their contract, the fact that it was unenforceable meant the Employee was entitled to the regular wages she would have earned for the rest of the fixed term.

In this case, that meant that the Employee was entitled to $157,071.57 in damages under Common Law. This amount represented the 101 weeks left in the Employee’s contract at the time of their termination.

Proper Termination Language is Essential

For most small organizations, having to pay $157,071.57 in damages is a major blow to their organization’s finances. If an organization is already in a poor financial situation, this kind of award can force an organization to take drastic measures like budget-cuts and layoffs.

But there is a reason why Courts have been increasingly strict in applying the ESA to termination language over the past decade. In this decision, Justice H.M. Pierce cited the general principles behind this shift, which recognizes that: 1) employees have less bargaining power than their employers, 2) employees are less likely to know the minimum standards they are owed, and 3) the ESA is remedial legislation that reflected the need for stronger employment standards in Ontario. Therefore, employers have a duty to ensure that their employees are provided with valid employment contracts.

Takeaways and Impact

Thankfully for employers, there are things that they can keep in mind to avoid these types of situations. The first thing they can do is ensure that when they hire new employees, they are giving them contracts that have enforceable termination language. This might require research, or even hiring a lawyer, but it will likely save the employer a lot of trouble if they have to terminate that employee.

Second, if an employer is concerned because they realize they have unenforceable language, there is the option to have employees sign new contracts with enforceable termination language. This requires the employer to provide fresh consideration, but that can be as simple as a small signing bonus. Keep in mind that in taking this approach, employees have the right to say no and keep the terms of their original contract.

Finally, employers should think twice before preparing a fixed term contract. While they have the benefit of a guaranteed end date, they come with the risk of big damages if there is any need to terminate the employee early. With an indefinite contract, an employer does not necessarily owe the employee any amount of money in damages on termination, so long as they provide the employee with proper notice or pay in lieu.

PooranLaw will continue to monitor the ongoing legal developments related to cases like these and report on them here. In the meantime, if you require legal assistance, we encourage you to reach out to your regular PooranLaw lawyer, or any member of our team.

Note: This article provides general information only and does not constitute, and should not be relied upon as, legal advice or opinion. PooranLaw Professional Corporation holds the copyright to this article and its contents may not be copied or reproduced in any form, in whole or in part, without the express permission of PooranLaw Professional Corporation