Knowing the ins and outs of employment contracts is of key importance for employees and employers alike. Employees want to know them to determine if a contract is too onerous, restrictive, or would unfairly disentitle them from a benefit. This is true whether the employee is a student who is just beginning their career, an experienced employee with years of service under their belt, or someone approaching retirement.

Employers likewise need to know what goes into employment contracts because employers are the parties who typically draft contracts. Employers need to know what terms are enforceable by courts, what terms employees expect to see, and what terms can be used to limit potential legal liability for employers.

What is an Employment Contract?

Employment contracts are the governing agreements in employment relationships. They set out the core elements of a person’s employment, including their wages, benefits, location and hours of work, and even their job duties. They also set out additional conditions that allow employers to take certain actions, including introducing a probationary period, temporarily laying off an employee, and binding the employee with restrictive covenants.

Employment contracts can be as short as a single-page document or can be dozens of pages long. It depends on the employer’s priorities and how extensively it wants to define the employment relationship with their employees.

What should be included in an employment contract?

In Ontario, the structure and contents of employment contracts are determined based on both the Employment Standards Act, 2000 (the “ESA”) and the common law. The ESA sets out the minimum entitlements of employees, including the minimum wage, vacation, and sick days. The common law, which is law created by the courts, sets standards for what constitutes ‘cause’ for termination, what constitutes a constructive dismissal, and what the reasonable notice of termination is for a particular employee.

Employment law changes often, whether it is the ESA or the common law. Employers and employees should have an employment lawyer draft and review their employment contracts regularly to ensure that their contracts are in compliance with the law and remain enforceable.

Some of the most common terms included in employment contracts include:

While many of these common terms are relatively straightforward, others come with specific legal requirements to be enforceable. Employees should review their contracts with a lawyer to see if their rights are impacted by one of these clauses. Employers should have an employment lawyer draft their employment contracts to ensure that these clauses meet legal requirements.

Restrictive covenants

Restrictive covenant is the term used to refer to clauses such as non-competition and non-solicitation clauses. Employers often attempt to protect their interests through these clauses, especially for employees who will have access to sensitive information, including customer and product information.

Non-competition Clauses are largely prohibited in Ontario after a 2021 amendment to the ESA. A non-competition clause that does not fall under an exemption will be unenforceable. The two most common exemptions are for executives of a business and employees who sold their business to new owners and remained employed by the new owners.

Historically, courts have preferred non-solicitation clauses to non-competition clauses because they are not as overbroad as non-competition clauses. Non-solicitation clauses are best used to ban a former employee from soliciting their former employer’s current clients or employees for a limited time for a short period of time following the end of employment.

However, enforcing these clauses is often extremely difficult and expensive. Canadian courts favour a competitive market. The court will refuse to enforce restrictive covenants that are ambiguous, cover too broad of a geographic area, or cover too long of a time period after employment.

If you are an employee or an employer and have restrictive covenants in your employment contract, you should contact our experienced team and have your contract reviewed.

Temporary lay-off clauses

Despite common belief, an employer cannot temporarily lay off an employee without an agreement that the employer is entitled to do so. This agreement is typically included in a written employment contract, but can also be formed through past conduct, such as prior temporary layoffs. If an employee is laid off without his agreement in place, they can sue their employer for constructive dismissal.

Temporary layoff clauses are also subject to restrictions in the ESA that limit how long an employee can be laid off. If an employee is laid off for longer than allowed under the ESA, the employee can sue their employer for constructive dismissal.

If you are an employee and have been laid off, you should contact our experienced team and have your contract reviewed to see if you have been constructively dismissed. If you are an employer and are considering laying off some, or all, of your employees, you should contact our experienced team and have your contracts reviewed to ensure that you are allowed to lay them off.

Termination clauses

Termination clauses are one of the most important clauses contained in employment contracts. Employers use them to limit the entitlements owed to an employee upon termination to the minimums under the ESA, which is measured in weeks of notice or notice pay. Employees try to get out of them because they want termination entitlements under the common law, which is measured in months of notice or notice pay.

Many employers assume that they can write a simple clause that uses stereotypical language and that will be sufficient to limit an employee’s entitlements. Worse, many employers use termination clauses written in other provinces or countries and assume they will be sufficient for Ontario.

These employers would be wrong. In the decision of Waksdale v. Swegon North America, the Ontario Court of Appeal held that ‘without cause’ and ‘with cause’ termination clauses in employment contracts must be read together. This means that if a ‘with cause’ provision violates the ESA, then the ‘without cause’ portion of the contract gets thrown out too. This trick can be used to invalidate a perfectly drafted ‘without cause’ provision and increase an employee’s entitlements to compensation after being let go. Since the ESA uses a higher standard of ‘cause’ than the rest of Canada, this case rendered most of the termination clauses in Ontario void.

The 2024 decision in Dufault v. The Corporation of the Township of Ignace ruled that language that is commonly found in ‘without cause’ termination provisions would invalidate those provisions. The Court specifically said that language that says that an employer may terminate an employee without cause “at its sole discretion” and “at any time” will invalidate a termination clause.  This will be far from the last time that the Court will make a decision that completely shakes up whether a ‘without cause’ termination provision is valid or not.

Because of these decisions, a large majority of termination clauses in employment contracts in Ontario are now void. There are many other reasons why a termination provision may be legally unenforceable. An unenforceable termination clause means that employees who are terminated without cause are entitled to common law notice of termination, which is worth more than the minimum amounts under the ESA.

If you are an employer, you want to have an enforceable termination clause to limit employees to their ESA entitlements. If you are recruiting a new employee or about to terminate one, you may benefit by having a lawyer review your contracts to see if they are enforceable.

If you have just been terminated ‘without cause’ or you are offered a severance package that limits you to your ESA entitlements, you may benefit by having a lawyer review your contract to see if you can get more compensation than your contract suggests.

Should I have my employment contract reviewed?

Yes. If possible, employees should have their employment contracts reviewed by an employment lawyer prior to signing them. Our experienced team reviews thousands of employment contracts per year. If you have just been offered a new position or have just been terminated, you may benefit by having a lawyer review your contract.

Employers should regularly have their employment lawyer review their contracts. This ensures that their contracts remain enforceable and can lower the employer’s liability in wrongful dismissal cases, constructive dismissal cases, and more. Employment law regularly changes, with recent decisions from Ontario courts rendering a large majority of termination clauses in employment contracts in Ontario unenforceable.

Employers who regularly review their employment contracts will be able to keep up with these rapid changes and continue to keep their contracts enforceable.

For more information on employment contracts in Ontario, please contact our firm.

At Levitt LLP, we specialize in guiding employees and employers alike through the complexities of navigating employment contracts. Our experienced team is committed to helping you understand any questions that you may have about employment contracts. Contact us for a consultation and take the first step in creating your ideal contract.

Please note that this article is only to be used as general information and it does not constitute legal advice. We encourage employees and employers to contact Levitt LLP directly to understand provincial employment contracts better and seek legal advice to their questions.