New Ruling on Employment Agreements

A recent legal decision highlights the critical need for employers to regularly review their employment agreements to avoid unexpected liabilities.

In Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029, an Ontario Superior Court Justice found a novel way to invalidate a termination clause, leaving an employer liable for two years’ wages to a former employee.

The plaintiff, a youth engagement coordinator with the municipality, still had 101 weeks to run on her fixed-term contract when it was terminated early, without cause.

Her employer initially paid her the two weeks’ termination pay provided for in the agreement, but the employee brought a wrongful dismissal claim, alleging the termination provisions were not enforceable.

On a summary judgment motion, Justice Helen Pierce sided with the plaintiff, finding the termination clause in her agreement violated Ontario’s Employment Standards Act (ESA) in three distinct ways.

First, because of an overly broad “for-cause” provision suggesting the employer had rights to withhold statutory and severance pay not contained in the ESA.

Secondly, because of a too-narrow “without cause” provision stating that the township would only pay “base salary” throughout the contractual notice period, when the ESA refers to the payment of “regular wages” during the notice period, which could include commissions, bonuses and other payments beyond base salary.

Thirdly — and most notably — Justice Pierce took issue with the contract’s termination provisions, stating that the employer could terminate without cause at “its sole discretion” and “at any time.”

The judge found this wording breached the ESA because the legislation stipulates situations when employers are prohibited from terminating an employee, including after a statutory leave or as reprisal for inquiring about or attempting to exercise a right under the ESA.

While the first and second ESA breaches are familiar to any employment lawyer in the province who is up to date on their caselaw, the third has never been seen before in a reported decision invalidating a termination clause.

The municipality is seeking to appeal Justice Pierce’s decision, so it remains to be seen if this decision will be overturned. In the meantime, employers would be best advised to have their standard employment agreements reviewed and updated by an experienced employment lawyer as soon as possible.

Tap the link below to read the judge’s decision: