Termination clauses continue to be under judicial scrutiny in Ontario

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A series of recent Ontario Court decisions have solidified and expanded the protection of severance rights in Ontario.

For the first time, s. 231(a) of the Canada Labour Code (CLC), has been relied on by an Ontario Court to find a termination clause in an employment contract unenforceable. The general rule has been that when a termination provision in an employment contract attempts to contract out of the statutory minimum standards legislation, that contract provision becomes null and void. Courts have strengthened this protection for employees by expanding what will now be considered as attempting to “contract out.” In the latest of these cases, Sager v. TFI International Inc. 2020 ONSC 6608, an employee was entitled to a common law notice period of nine months for two years and nine months of work.

Sager represents another step towards the Ontario Courts’ steadfast attempts to protect the basic rights of terminated employees. This decision is important for two reasons: 1) the court relied on the CLC to hold that a termination provision was unenforceable and 2) the termination provision itself was more generous than the statutory requirements under the CLC.

Past jurisprudence in the Ontario Courts have focused on the provincially legislated Employment Standards Act. However, in Sagar the employer was in the industry of cross-jurisdictional transportation and thus the CLC applied. Section 231(a) of the CLC reads: “Where notice is given by an employer pursuant to subsection 230(1), the employer (a) shall not thereafter reduce the rate of wages or alter any other term or condition of employment of the employee to whom the notice was given except with the written consent of the employee.” Justice Davies read the termination clause at issue which allowed for one lump sum payment in lieu of termination and deemed it to be an attempt to contract out of the statutory minimum. The court relied on the fact the lump sum severance payment did not provide for benefits such as health insurance, car allowance, pension contributions and participation in the employer’s bonus plan which had a value of up to 30% of his base salary.

Of particular interest was the fact the termination provision allowed for the greater of three months’ base salary, or one month base salary per year of completed service, to a maximum of 12 months which was also inclusive of the CLC. This was well above the statutory requirement. The court agreed that there is no scenario in which the termination and severance payable under the CLC would exceed the termination pay required to Sager. However, that did not prevent the court from determining that the impugned clause in the contract was contrary to the CLC.

This case follows a trend of increasing judicial scrutiny of termination clauses in employment contracts. In Waksdale v. Swegon North America Inc., [2020] O.J. No. 2703 the Ontario Court of Appeal overturned the motion judge and ruled that an illegal termination provision in an employment contract can render a completely separate termination provision unenforceable.

Since then, cases such as Sewell v. Provincial Fruit Co., [2020] O.J. No. 4024 and Ojo v Crystal Claire Cosmetics Inc., 2021 ONSC 1428 have expanded the scope of what can be deemed an unenforceable termination provision by finding that just cause termination clauses that do not import the high statutory bar of “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and have not been condoned by the Employer” are unenforceable.

Soma Ray-Ellis is partner and chair of the Employment and Labour Law Group at Gardiner Roberts LLP.