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Future Proofing Employment Contracts: Ensuring the Validity of Termination Clauses

Future Proofing Employment Contracts: Ensuring the Validity of Termination Clauses

By October 14, 2019March 4th, 2022No Comments

Employers must exercise caution when drafting the terms of employment contracts. An improperly drafted provision in an employment contract can have unintended consequences, even if an employer’s application of that provision is valid in the given situation. Contract provisions must fall within the minimum standards set out in provincial legislation, and they must do so under all circumstances throughout their duration.

The Ontario Employment Standards Act (“ESA”) provides the minimum standards for most employers and employees in Ontario. The ESA establishes rights and responsibilities for employers and employees, including the minimum standards surrounding reasonable notice of termination or payments in lieu of notice. These requirements change according to the service time accrued by a particular employee. For example, the ESA does not require notice for employees who have worked for three months or less, employees who have worked between three months and one year are entitled to one week, and employees of over three years are entitled to three weeks.

The Ontario Court of Appeal decision in Covenoho v. Pendylum Ltd. marks a significant development in how a termination clause that fails to address the future implications of its language can become a much greater problem for employers. In Covenoho, a termination clause in a one-year fixed-term employment contract was found to be of no force and effect because it failed to ensure that employees who had worked for at least three months would receive the ESA’s required amount of notice of termination in all applicable circumstances.

The employment agreement included the following termination clause:

  • 2.1 The term of this Agreement will commence on the date of this Agreement and will continue
    in full force and effect unless the Agreement is terminated as follows:
  • (a) immediately by PENDYLUM providing written notice to you if you violate or fail to honor any
    of these provisions of this Agreement or fail to perform your duties as set out in Appendix A in a
    satisfactory manner as determined by PENDYLUM (known as Cause); or if the PENDYLUM Client
    to which you have been contracted terminate[s] its contract with PENDYLUM for your
    (b) by either party providing written notice of at least two (2) weeks to the other.

Although the employee was terminated within ESA standards, just before reaching three months of service and without notice or payment in lieu of notice, the Court determined that the termination clause was of no force and effect because the contract would violate the ESA after the three month mark in circumstances where the PENDYLUM Client to which the employee had been contracted terminated its contract with PENDYLUM. That is, since the provision’s application could potentially violate the ESA at a date after the employee’s hiring, it was void and common law entitlements applied. In determining what the employee was entitled to under the common law the Court relied on Howard v. Benson Group Inc., in which the Court stated “[i]n the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term and that obligation will not

be subject to mitigation”. The employee was awarded full payment of the remaining 40-weeks of the fixed-term employment contract in the amount $56,000. All employers should take note: failure to address employment standards for the duration of an employment contract can be a costly mistake.

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