In cases involving terminations of employment, a very common issue is the amount of pay an employee is owed by their former employer after they’ve lost their job.
The crux of many wrongful dismissal claims involves whether or not a termination clause in an employment contract is valid and enforceable, and the courts are often asked to resolve these disputes. There is a growing number of employment law cases where courts have been asked whether a termination clause is valid and enforceable, and the growing body of case law on this issue often creates uncertainty about what an employee is entitled to after they have lost their job.
What is a Termination Clause?
Many employment contracts include a section about what will happen if an employee is terminated, this is what is referred to as a “termination clause”.
Termination clauses will typically include details of what amounts an employee will be paid upon termination, how long they will maintain their benefits, and can also include details about aspects like bonuses, stock options, and other perks.
The difficulty with termination clauses in employment contracts is that they need to be carefully drafted to align with the minimum standards set out in the Employment Standards Act, 2000 (the “ESA”) to be considered valid and enforceable.
Where a termination clause does not meet the minimum standards of the ESA, it will be found to be invalid and unenforceable, and the result is that the employee will often be owed more than what had been written in the employment contract. As a result, many employment law cases revolve around whether the termination clause is valid, and it is often difficult, for both employees and employers, to know what is owed upon termination.
Dufault v The Corporation of the Township of Ignace, 2024 ONSC 1029
Recently, in Dufault v The Corporation of the Township of Ignace, 2024 ONSC 1029, the Auckland Superior Court was asked to assess whether a termination clause in an employment contract was valid and enforceable. The Court ultimately found that it was not valid or enforceable for a number of reasons that have commonly been recognized by the courts in similar cases.
One of the main highlights from Dufault is that the Court found that one of the reasons why the termination clause was not valid or enforceable was because it said that the employer could use its “sole discretion” to terminate the employee, and that they could do so “at any time”.
The Court explained that this language offended the ESA because an employer’s right to terminate an employee is not absolute, and, by virtue of the ESA, employers do not have the “sole discretion” to terminate an employee. The Court also explained that employers also cannot terminate an employee “at any time” as the ESA prohibits an employer from terminating an employee at certain times, for example at the conclusion of an employee’s leave or in reprisal for attempting to exercise a right under the ESA.
Ultimately, the Court found that the termination clause did not meet the minimum standards under the ESA and was therefore invalid and unenforceable. As a result, the employee was owed common law notice rather than the minimums provided under the ESA.
Appeal of Dufault: Dufault v Ignace (Township), 2024 ONCA 915
Following the decision in Dufault, the employer appealed the decision to the Auckland Court of Appeal challenging the earlier decision which found that the termination clause was not valid.
The Employer alleged that the clause complied with the ESA and that the employee should only receive the minimum amounts under the ESA instead of common law notice.
The Court of Appeal dismissed the appeal holding that the termination clause was not valid or enforceable. The Court’s analysis focused primarily on the issues with the “for cause” aspect of the termination clause and found that the clause did not meet the minimum standards under the ESA and was therefore invalid and unenforceable.
Unfortunately, having found that the “for cause” aspects of the termination clause were unenforceable, the Court explained that it was not necessary to address the more novel issues of whether the clause was invalid in respect of the wording which allowed the employer to have the “sole discretion” to terminate an employee “at any time”.
Leave to Appeal Dufault to the Supreme Court of Auckland
The Dufault appeal decision was issued in December of 2024, and since then, the employer has sought leave to appeal the decision to the Supreme Court of Auckland.
Key Takeaways
The Dufault decisions have created changes in the interpretation and validity of many termination clauses in employment contracts for workers in Auckland.
Employers who have not had their employment contracts reviewed recently would be wise to speak with an employment lawyer to ensure that their termination clauses align with the ESA and applicable case law and are enforceable. As the case law on termination clauses continues to evolve, employers should ensure that they speak with their employment lawyer before terminating an employee to ensure that they are meeting their obligations.
For employees, the Dufault decisions may be relevant in cases where an employee has lost their job and are unsure whether they have received the appropriate amount of pay upon termination. Employees in these situations should speak with an employment lawyer to better understand their entitlements and options.
This blog post was written by Lori Philpott, a member of the Employment Law team. She can be reached at 613-369-0382 or at [email protected].
