HR professionals and employment lawyers alike are digesting the recent Dufault v. The Corporation of the Township of Ignace ruling by the Ontario Superior Court of Justice that could reshape how termination clauses in employment contracts are interpreted and enforced.
That’s because the court focused in on specific language found in many employment contracts, according to Stuart Rudner, employment lawyer, mediator and founder of Rudner Law.
“Wording that allows an employer to dismiss without cause ‘at any time’ and ‘at its sole discretion’ is fairly commonplace and had never been used to defeat a termination clause,” he said.
The Dufault ruling
The case centred around the termination clauses of Karen Dufault’s fixed-term employment contract. Dufault, a youth engagement co-ordinator with the Township of Ignace, was let go without cause on Jan. 6, 2023. She sued for wrongful dismissal and damages for the remaining term of the contract.
In ruling the termination clauses in her contract to be unenforceable, the Court noted that the “right of the employer to dismiss is not absolute.”
It sided with Dufault, stating that language giving the employer “sole discretion” to terminate at any time “misstates” Ontario’s Employment Standards Act (ESA). For example, the Court said “the Act prohibits the employer from terminating an employee’s leave (s. 53) or in reprisal for attempting to exercise a right under the Act (s. 74).”
The Court also found other deficiencies in the clauses, ruling they conflicted with the ESA — particularly around termination without cause and severance pay.
It pointed out that neither the ESA or its regulations refer to a “for cause” dismissal, but the contract gave the township the right to withhold termination pay and severance pay in the event of a dismissal for cause.
The Court also took issue with wording in the contract that would justify termination for cause, “including, but not limited to, failure to perform services, wilful negligence or disobedience not condoned by the Township or resulting in injury or damages.”
It pointed out that “failure to perform services” is not the same as “wilful misconduct.”
Furthermore, the Court said the “without cause” provisions also contravened the ESA. It concluded that Dufault’s vacation pay, sick pay, and paid leave mentioned in the contract formed part of her regular wages, but the termination provision did not reference them.
Scrutinizing contracts
Rudner said the Dufault ruling is the continuation of a trend in which courts will find new ways to invalidate termination clauses; in some cases, Courts even looked at other sections of the contract above and beyond the termination provisions.
“They’re now looking at other sections of the contract, and I think the next evolution we’re going to see is courts looking at tangential documents,” he said. “In other words, if you have a clause in a document such as an Incentive Plan or Bonus Program that could potentially breach the ESA, it could invalidate the termination clause in the contract.”
It’s not a stretch to say that, for example, a bonus policy that states employees must be “actively employed” to qualify could be found to be in violation of the act and, therefore, the termination clause is unenforceable, said Rudner.
Rudner noted the Dufault ruling, as a trial decision, is not binding on any other court — meaning it doesn’t necessarily have to be followed.
“If it was a Court of Appeal decision, that would be binding on any lower court,” he said. “It is persuasive, but another judge is free to take the same set of facts and come to a different conclusion. That said, it is part of a clear trend, and should not be discounted or ignored.”
How employers should respond
But that doesn’t mean employers shouldn’t take steps as a result of the ruling, he said.
“You need to make sure that your contracts are constantly being reviewed and ensure they’re up to date,” said Rudner. “Even if you had one drafted two years ago by an employment lawyer, you’ll want to review it now to make sure it complies with the latest case law.”
The team at Rudner Law has been reviewing its templates as a result of this case, noting that the current versions “would hold up to challenge even based upon the latest caselaw.”
“We’re always looking for that next potential weakness and we are streamlining some of the wording,” he said. “Sometimes, language that can seem so innocuous — like in the Dufault case where it says the employer can, at any time, terminate you at their sole discretion — can come back to haunt you. One of the things we’re doing is trying to take out any wording that is not necessary, because we don’t want to give any court an opportunity to find faults.”
Fixed-term contracts
While the Dufault ruling involved a fixed-term contract, the lessons from it hold true for all employment contracts, he said.
The main difference is that, in a fixed-term contract, employers could be on the hook for the entire contract versus common law damages for indefinite contracts, he said.
The Court awarded Dufault a total of $157,071.57 — including 101 weeks’ base salary and benefits, which was the balance of the term.
Rudner said he’s never been a fan of fixed-term contracts, especially if they’re essentially renewed automatically, unless there’s a really good reason for it.
“At some point, courts are going to look at it and realize it’s a sham anyways and it really is an indefinite term of employment,” he said.
A better tactic is to adopt indefinite term contracts that have a strong and enforceable termination clause, said Rudner.
Swinging pendulum
“We’ve seen the pendulum go back and forth when it comes to enforcement of termination clauses,” said Rudner.
Not long ago, there was what he called a “common sense revolution” in the courts when it came to the enforcement of termination clauses.
“We had a couple of cases that said courts shouldn’t be looking to find ambiguities that don’t exist,” he said. “They focused on being faithful to the clear intentions of the parties.”
But the tide has turned in the wake of recent rulings, including Waksdale v. Swegon North America Inc., Henderson v. Slavkin et al., and now Dufault, where courts seem to be “looking for any possible excuse they can find to invalidate a termination clause,” said Rudner.
For more information about Rudner Law’s Alternative Dispute Resolution, visit https://www.rudnerlaw.ca/alternative-dispute-resolution/. Stuart Rudner can be reached at 416-864-8500 (phone or text) or [email protected].
