A well-drafted employment contract is the best employment law investment an employer can make. It protects an employer from significant liability and will usually save thousands of dollars in termination costs.
An employment contract should be reviewed periodically because judges are refusing to enforce termination clauses if they are not drafted properly.
In a recent case, Ontario’s highest court concluded a termination clause was not legally enforceable because it might breach the Employment Standards Act (ESA) in the future.
The employee signed a one-year fixed term contract with the employer. The employer terminated her agreement without advance notice when she had been employed for less than three months. The termination clause stated in part that the contract could be terminated before the end of the fixed-term “if the [company] Client to which you have been contracted terminate[s] its contract with [the company] for your services”.
Decision by motion judge
The motion judge concluded that since the employee had been employed for less than three months, she was not entitled to any notice of termination. Under the ESA an employer is not required to provide any notice of employment to an employee during the first three months of employment.
Decision by Court of Appeal
The Court of Appeal reversed the motion judge’s decision and found that the termination provisions were void. It ruled that “the terms must be construed as if (the employee) had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void”. In this case, if the employee had been terminated after three months of work, then the termination clause would have violated the ESA because she could have been terminated without any notice of termination (or any payment in lieu of notice) contrary to the ESA. The court also ruled the employee was entitled to receive the salary that she would have earned for the balance of the fixed term contract.
Lessons for employers:
1) Employers should periodically review their termination clauses to ensure they are properly drafted and do not provide shorter notice than required by the ESA.
2) As we have written about before, it is generally a bad idea to enter into a fixed term contract. If a fixed term contract must be used, it must include an enforceable early termination clause.