On July 9, 2020, The Ontario Superior Court of Justice (“ONSC”) released another important decision on the enforceability of termination clauses in employment agreements. In Rutledge v Canaan Construction [Rutledge], the ONSC reiterated the principle that: if a termination clause has the potential to violate the Employment Standards Act, 2000 [ESA] in the future, the clause is unenforceable and does not limit the employee’s termination entitlements.
Mr. Rutledge, the employee in the decision, was a construction worker employed by Canaan Construction. Mr. Rutledge’s occupation is particularly relevant in this decision, as under the ESA construction workers are not entitled to notice or pay in lieu of termination or severance pay. Mr. Rutledge’s employment agreement contained a termination clause (the “Termination Clause”) which stated that he would entitled to “absolutely no notice or pay and benefits in lieu thereof “ upon termination of his employment due to his position being exempt from these entitlements under the ESA.
Mr. Rutledge brought an action against his former employer in the Ontario Small Claims Court for wrongful dismissal after he was placed on a layoff and was not recalled to his position. In defence, Canaan Construction claimed that it had no obligation to provide Mr. Rutledge any notice of his termination or pay in lieu thereof, relying on both the Termination Clause and the exception for construction employees under the ESA.
The Small Claims Court Decision
The Deputy Judge at the Small Claims Court held in favour of Mr. Rutledge and found that the termination clause in his employment contract was void because it violated the ESA obligation to pay benefits during the statutory notice period, despite that Mr. Rutledge is a construction employee and therefore exempt from termination notice (and continuation of benefits during the notice period) under the ESA. Mr. Rutledge was awarded $9,530 in damages for wrongful dismissal, equivalent to 9.5 weeks of his salary.
Canaan Construction appealed the Small Claims Court decision to the ONSC.
The ONSC Decision
The ONSC dismissed the Canaan Construction’s appeal, finding that the Termination Clause was invalid for two reasons.
First, the ONSC held that although Mr. Rutledge was a construction employee for the entirety of his employment, it was possible that his position with Canaan Construction could have changed to a non-construction role in the future had he remained employed, in which case Mr. Rutledge would have become entitled to termination notice under the ESA. The ONSC held that the Termination Clause was therefore problematic because it did not explicitly state that the exclusion of notice entitlements applied to Mr. Rutledge only while he occupied a position as a construction employee, and did not provide for his entitlements under the ESA in the event that his position were to change.
Second, while the entitlement to notice or pay in lieu did not apply to Mr. Rutledge because he was a construction employee, the entitlement to severance pay is based on the employer’s size: specifically, if Canaan Construction grew to employ over 50 employees and then discontinued its business, or else had a payroll of over $2.5 million, Mr. Rutledge would be entitled to severance pay under the ESA, regardless of his position. The Court held that because the Termination Clause simply disentitled Mr. Rutledge to severance pay and did not consider a potential future obligation to pay severance pay, the Termination Clause created a potential violation of the ESA, which rendered the clause unenforceable. It is noteworthy however that this finding by the ONSC may be incorrect, as construction employees are explicitly exempt from severance pay entitlements under the ESA’s regulations.
The ONSC held that the Termination Clause was unenforceable because it purported to contract out of the ESA in at least two ways. The Court affirmed that even a potential violation of the ESA, “no matter how remote,” renders a termination clause unenforceable. Accordingly, the ONSC dismissed Canaan Construction’s appeal and upheld the Small Claims Court’s finding that Mr. Rutledge was entitled to the common law reasonable notice.
The ONSC also noted that, even if the Deputy Judge before the Small Claims Court had incorrectly stated that Mr. Rutledge had been disentitled to benefits during the ESA termination notice period, which he would not have received anyway, the outcome of the case remained the same, because the termination clause, read as a whole, violated the ESA for the two reasons outlined above. Therefore, whether or not Mr. Rutledge was in fact entitled to be paid benefits upon his dismissal was not relevant to finding that the clause violated the ESA.
Takeaways for Employers
This decision is yet another example of why employers should proactively seek legal advice in drafting and revising their employment agreements, as the law on the enforceability of termination clauses is continually evolving, and even the seemingly most minor discrepancies in the language of termination provisions can render them unenforceable, exposing employers to significant liabilities and entitling dismissed employees to costly common law notice entitlements.
Rutledge reiterates the principle that a termination clause that could potentially breach the ESA at any date after hiring is void and unenforceable, even if the employee receives their minimum entitlements under the termination clause at the time their employment is terminated. This was the holding by an earlier decision by the Ontario Court of Appeal in Covenoho v Pendylum Ltd. However, the “potential breach” considered in Rutledge is far more remote than that considered in Covenoho, which involved a hypothetical potential breach of the ESA that would have resulted if the contract had continued for a longer period than it did. In Rutledge, the potential breach of the ESA would have had to result from a hypothetical change made by the employer to the character of the employee’s employment, namely the employee being transferred into a non-construction role and therefore being entitled to their termination entitlements under the ESA.
The decision in Rutledge has implications for construction employers with non-unionized employees. In the event that an employer relies on construction employees and there is any chance, no matter how remote, that these employees will in the future become non-construction employees, employers must ensure that this potential change in employment is contemplated in their termination provisions such that the employee would receive their minimum entitlements under the ESA in the event that their employment took on a non-construction character.
Rutledge also highlights why employers should make use of “saving provisions” in their termination clauses: provisions which provide that employees will receive their minimum entitlements, regardless of any other language in the termination clause. However, it should be noted that saving provisions will not save a termination clause that explicitly attempts to contract out of the ESA.
Employers must be extremely cautious with termination clauses, even when at first glance an employee is exempt from certain entitlements under the ESA. These termination provisions should provide language that contemplates what the employee would be entitled to should that employee change positions or if the employer were to grow in size to be required to owe severance pay under the ESA.
Employers should continue to reassess their termination clauses within their employment agreements on an ongoing basis, as the law on termination clauses in Ontario is constantly changed and rendering certain language to be void and unenforceable.
This blog is provided as an information service and summary of workplace legal issues. This information is not intended as legal advice.