Employers: Be Mindful of Possible Unenforceable Termination Clauses in Fixed-Term Contracts

Written by:  Barbara Green and Thien Hoang

In Tarras v. The Municipal Infrastructure Group Ltd., the Ontario Superior Court of Justice held that an unenforceable termination provision entitled the terminated employee to payment of the balance of a fixed-term contract. The employee was awarded, amongst other entitlements, over $400,000 in damages.

The Facts

The Plaintiff was a professional engineer and a former owner of the Defendant employer, The Municipal Infrastructure Group Limited (“TMIG”). The Plaintiff’s interest in TMIG was sold by way of a share purchase transaction. In connection with the transaction, the Plaintiff negotiated a three year fixed-term employment contract with TMIG (the “Agreement”). The Agreement was drafted with participation of the Plaintiff and included provisions for early termination of the fixed-term.

Approximately 13 months into the term, the Plaintiff was dismissed on a “without cause” basis. The Plaintiff subsequently filed an action against TMIG for wrongful dismissal seeking compensation for the remaining balance of the term.

The Court’s Decision and Reasoning

The dispute concerned the enforceability of the termination clause contained in the Agreement which purported to limit the Plaintiff’s rights to his statutory entitlements.

In addition to permitting TMIG to dismiss the Plaintiff without cause, the Agreement also provided for termination without notice or severance pay “for cause”, defined in a manner that went beyond the scope of the limited exceptions under the Employee Standards Act (the “ESA”). The Court found the “for cause” language contravened the ESA. Relying on the Ontario Court of Appeal’s decision in Waksdale v. Swegon North America Inc., the Court held that the unenforceable “for cause” provision subsequently rendered the entire termination clause under the Agreement void and unenforceable.

The Court decided that the sophistication of the parties and the fact that legal counsel was retained during the course of negotiations were “subjective considerations,” which should not be given any weight when assessing statutory compliance of the ESA. The Court also found it irrelevant that the parties did not rely on the unenforceable provisions. Rather, the plain wording of the termination clause in an employment agreement, and whether the wording contravenes the minimum standards under the ESA, is the approach that Courts will adopt in assessing whether a termination clause is enforceable.

The Court held that, in the absence of an enforceable early termination clause, a fixed-term employment agreement obligates an employer to pay an employee to the end of the term. This obligation is not subject to any duty on the employee’s part to mitigate. Consequently, the Plaintiff was awarded his remaining 23 months salary and other entitlements under the Agreement.

Takeaways for Employers

Ontario Courts have continued to adopt the strict and technical approach in the Waksdale decision when assessing the enforceability of termination clauses. Employers must be mindful to adhere to the ESA’s minimum standards in drafting termination provisions in employment contracts.

The Tarras case serves as cautionary tale to employers about the added perils of fixed-term employment contracts in the event of an unenforceable termination provision. Unlike an indefinite term contract, an employee does not have an obligation to mitigate their damages under a fixed-term contract.  

If you have any questions regarding workplace matters, including employment contracts, please reach out to Barbara Green via email at bgreen@robapp.com.