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Since 2017, Ontario courts, including the Court of Appeal, have had a great deal to say about the enforceability of termination clauses in employment agreements. However, the majority of these cases have focused on what constitutes a valid “without cause” termination clause and have not considered what makes a “for cause” termination clause enforceable. In Khashaba v Procom Consultants Group Ltd. [Khashaba], the Court considered what factors make a for cause termination clause enforceable.

Background

In Ontario, provincially-regulated employees in a non-unionized setting can be dismissed from their employment at any time for any reason that is not discriminatory provided that the employer provides them with reasonable notice of termination of their employment. Employers in Ontario may also dismiss employees without providing notice, if the employee has engaged in misconduct which is so egregious it gives the employer just cause to terminate the employee’s employment. While enforceable termination clauses can limit an employee’s entitlement on termination from common law reasonable notice, to the much lower statutory entitlements guaranteed by the Employment Standards Act, 2000 (the “ESA”). However, significantly, even if an employee’s employment is terminated for just cause, the employee is entitled to their statutory termination notice under the ESA unless their misconduct meets the even higher standard of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” set out in the ESA.

The Decision

In Khashaba, the employee was interviewed by a recruitment firm for a position with a client business. The interview process went well, and the recruiter indicated that the client likely would take on the employee’s services through the recruitment firm. Prior to receiving confirmation from the client that it wished to take on the employee, the recruiter sent the employee an employment agreement. The “Termination for Cause” provision in the employment agreement read as follows:

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.

The employee signed and returned the documents to the recruiter. Shortly after returning the employment agreement, the client decided that it did not wish to take on the employee’s services and the recruitment firm informed the employee that he would not be taking up a position with that client. The employee filed a claim alleging that he was entitled to the entire value of the employment contract, which was for a fixed term of six months. Generally, an employer that dismisses an employee on a fixed term contract will be required to pay out the remaining value of the contract if the employee is dismissed without cause and without an enforceable termination clause. The employee argued that the Termination for Cause clause was unenforceable because it violated the ESA and he was entitled to the full value of the unexpired contract.

The Court found that the clause violated the ESA because it provided for termination without notice or pay in lieu of notice for employee misconduct which only rose to the level of just cause. As we mentioned earlier, for the purposes of the ESA, employers may only dismiss employees without notice or termination pay in the event they have engaged in wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer—a higher threshold than just cause.

The Court also considered the saving provision contained within the termination without cause clause. Saving provisions provide that if a termination clause does not meet the ESA minimum entitlements the employee’s entitlement will be increased to meet the minimums. Courts have recently found these clauses to be a legitimate means of saving an otherwise invalid termination clause. However, in this case, the Court found that the saving provision in the termination without cause clause did not save the termination for cause clause because it was not clear that the saving provision was ever meant to apply beyond the termination without cause clause.

The Court also rejected another of the employee’s arguments that the invalidity of the termination for cause clause ought to render all of the termination provisions of the contract invalid. The Court found that since each termination provision in the contract was listed as a separate item, the validity of one clause would not affect the validity of the others. Since the employee was alleging to have been terminated without cause, his hope was to render the termination without cause clause invalid by proving that the termination for cause clause was invalid, but the Court disagreed with this approach.

Ultimately, the Court found for the employee, determining that the employer had entered into an employment agreement with him after negligently misrepresenting the situation as settled when in fact the job offer was subject to approval from another authority. The Court found that the employee would have been entitled to the entire value of the six-month contract but the termination without cause provision limited his entitlements to those found in the ESA. Since it was only the termination for cause clause which was invalid, the termination without cause provision was held to apply and the employee received no compensation since he had not worked long enough to be entitled to any notice under the ESA.

Takeaways

This case provides further guidance for employers that are drafting new employment agreements and want to include termination clauses. The first lesson is that setting out each condition for termination separately can mitigate negative consequences if one of the provisions is found to be invalid. Employers should also note that if they wish to include a saving provision in their termination clauses, it must be inserted into each individual clause in order to apply.

Lastly, this case is a reminder that it is not only clauses respecting termination without cause that need to be drafted carefully. All termination clauses must be scrutinized to ensure they meet the standards of the ESA. Employers should be mindful of the distinction between the just cause standard and the higher statutory threshold of wilful misconduct, and of how this distinction affects the construction of a for cause termination clause. Employers who mindfully incorporate these principles into their employment contracts can spare themselves considerable costs and headaches and provide employees with a clear understanding of what will occur if their employment is terminated.

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