Employment contracts are a tricky business. We spoke in our recent blog about the importance of employment contracts, and how they’re instrumental in setting out the expectations for both employers and employees in the working relationship. For employers especially, they are meant to provide a sense of formality, and certainty.
They can also be minefields.
That’s because employment contracts are different from most other types of contracts. Yes, it is possible to draw up a simple contract between two friends on a bar cocktail napkin and turn it into a legally binding agreement (although we do NOT recommend this!). But employment contracts? Those are a whole other animal.
For decades now, courts have recognized that the power balance between employers and employees is an uneven one. Employers naturally hold most of the power in the relationship, so courts view employment contracts with a hyper-critical eye. As one employer learned earlier this year, if contracts are not written precisely in line with the law, they may not do much to protect the business from serious financial obligations.
A closer look at Dufault
Employment contracts can even be tricky for lawyers at times, because court decisions can offer mixed guidance over what exactly a contract needs to say in order to be legally valid. However, there are key decisions that come down from various courts that provide further clarity, and a key one from earlier in 2024 offered precisely that.
In Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029, the Plaintiff, Ms. Dufault, had worked for the Township for a short time as their Youth Engagement Coordinator. In her role, she earned $75,000 plus various benefits, and was able to participate in the Township’s pension plan as well.
Ms. Dufault did not work for the Township for very long. She began her employment at the end of October, 2021, and within three months was promoted into her current role. In late November 2022, she was offered a fixed-term employment contract that ran throughout the end of December 2024. Nevertheless, her employment was terminated without cause only weeks later, on January 26, 2023. She was offered two weeks’ pay plus benefits.
The dispute, which went to summary judgment (a shorter appearance before a judge when there are no issues that need a full trial), was ultimately about the wording of Ms. Dufault’s termination clause in her employment contract. The contract spelled out in two lengthy clauses the conditions of Ms. Dufault’s termination of employment both with cause, and without cause.
Her fixed-term contract created an interesting wrinkle. Under Ontario law, an employee on a fixed-term contract can be let go from their employment provided that their contract follows the law. If they challenge the legality of their contract, and the Court agrees, then that employee is owed the full salary for the remainder of the contract. In this case, Ms. Dufault claimed that despite only working under that contract for 3 months, she was owed the full 2 years’ pay.
The Court’s ruling
The Court upheld previous rulings that employment contracts are unique from other contracts, and relied on some basic principles for how employment contracts should be interpreted. These include:
- Employees have less bargaining power when employment contracts are made
- Employees are likely unfamiliar with the legal language and legal standards and so may be less likely to challenge these contracts
- The Employment Standards Act (“ESA”) is meant as a remedy, and so courts should encourage drafting agreements that are compliant, and that protect employees
- A termination clause will only limit an employee’s entitlements if it is clear, since they should know this from the outset of the relationship
- Courts should interpret these clauses in ways that give the employees the greater benefit
- An employment contract that is not consistent with the ESA is invalid
- Courts should interpret contracts in the context that they were intended at the time that they were agreed-upon by the parties
- When reviewing termination clauses, courts should look for the true intention of the parties instead of looking for ambiguities to set aside the agreement.
Courts have also ruled that if one portion of the contract is invalid, then the whole provision may be invalid. For example, even if Ms. Dufault was not terminated for cause, but the ‘cause’ clause in her contract was problematic, it would invalidate every portion of the termination clause in her contract.
Ultimately, the Court found that the termination clause in Ms. Dufault’s contract contravened the ESA in multiple places. The ‘cause’ section of her termination contract did not align with the narrow window in the ESA which allows an employer to terminate employment for cause without any further payments. It attempted to use a broader standard, which the Court held was not allowed.
The Court found that the ‘without cause’ portion of the contract also defied the ESA requirements. Its proposed payouts did not account for vacation pay, which is a requirement under the ESA, or the sick days that were included in Ms. Dufault’s contract. It also gives the employer the right to terminate her employment in its ‘sole discretion,’ which is not accurate – employees cannot be fired for being on a protected leave, or as reprisal for asserting their rights.
In Ms. Dufault’s case, thanks to the fact that this was a fixed term contract, she was awarded her full 101 weeks’ salary and benefits – just over $150,000.
Final Thoughts
This case raised controversy within the employment law world, as most employment contracts allow an employer to terminate an employee’s tenure ‘at any time,’ but here the Court said that such language is not permissible. If this ruling is upheld by other courts, it may be a game changer for the drafting of employment contracts going forward.
The one constant with employment contracts is change. For employers, it is crucial to keep up with the law, which means that the contracts that you had prepared 5, 10, or 20 years ago are likely no longer in line with the law. Working with an employment lawyer means they can review your contracts regularly and help keep you in the best position possible for any legal challenges that may arise.
For employees, the contract that you signed when you started work may no longer be valid today! If you believe your employment has been wrongfully terminated, consult with an employment lawyer before signing anything. They will review your contract and can help you assess whether or not it’s actually as restrictive as it looks and sounds. A contract that would not stand up in court may mean that you are entitled to significantly more money upon termination.
For all your employment law needs, our team is here to help. Contact us today to set up a consultation.
