Another Termination Clause Bites the Dust

Employers do not usually draft employment contracts with the future in mind. However, in a recent decision, the Ontario Superior Court of Justice ruled that a failure to do so may be fatal to the enforceability of a termination provision.

The case

In the July 9, 2020 wrongful dismissal case of Rutledge v Canaan Construction Inc.[1] (Rutledge), the Court ruled that Mr. Rutledge’s employment contract was void because it had the potential to violate Ontario’s Employment Standards Act, 2000 (ESA) in the future. The Court held that the employment contract was void for two reasons:

1. The contract denied Mr. Rutledge his statutory entitlement to benefits in the event that his position changed in the future.

In this case, Mr. Rutledge worked as a construction apprentice for Canaan Construction Inc. The ESA creates a carve-out for construction employees, where such employees are not entitled to statutory notice of termination or pay in lieu of notice. Although Mr. Rutledge was a construction employee, the Court ruled that “on the chance that Mr. Rutledge’s position at Canaan changed to something other than a construction employee, the effect of the employment contract denies him his right to benefits during his notice period, which is protected by the ESA.”

2. The contract did not provide for the possibility of statutory severance for Mr. Rutledge in the future. 

Mr. Rutledge’s employment contract had no provision for the future possibility of statutory severance. Although Mr. Rutledge would not have qualified for statutory severance at the time of termination, there was the potential that the company could have at a future date: (i) had an Ontario payroll of $2.5 million or more; or (ii) employed 50 or more employees and subsequently discontinued its business. If so, there would have been a violation of the ESA, which in turn would have rendered Mr. Rutledge’s employment contract unenforceable.

Significance

Although the requirement to comply with minimum employment standards legislation is not new, Rutledge reiterates the growing legal principle that employers must consider hypothetical future scenarios when drafting termination provisions. Employers must now meet an even higher burden if their contract provisions are to withstand judicial scrutiny.  

Employers now have two recent decisions – Rutledge and the Ontario Court of Appeal decision of Waksdale v Swegon North America Inc. – which both serve to remind them of the importance of drafting employment contracts that are in compliance with minimum standards legislation, both now and in the future. As a result, there is no better time than now for employers to review their employment contracts in order to limit liability at the end of an employee’s working relationship.  

For our case law update on the Waksdale v Swegon North America Inc.  decision, please click here.


[1] 2020 ONSC 4246.

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Stefanie Chimienti

About Stefanie Chimienti

Stefanie is an associate in the Employment and Labor group at Dentons. She advises Canadian and international companies on all areas of employment and labor matters, including employee hiring, employment standards, human rights, employee benefit plans, labor relations, and workplace safety and insurance matters. She also provides employment and labor advice on corporate transactions.

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