Most employment contracts are unenforceable and employees should be very suspicious if their employer suddenly asks them to sign a new one

To the point, it is near impossible to establish cause to dismiss an employee without compensation, and severance awards keep going up — from a six month maximum when I started practicing law, to 12, to 24, and now, with 30-month awards emerging, the sky appears to be the limit.

What is an employer to do?

Obviously, sign their employees to contracts limiting that severance. Employees, anxious to have a job and optimistic as to their prospects when walking in the door, will often credulously sign them.

But even then, the law steps in, invalidating most employment contracts.

There used to be limited legal defences to such contracts, such as being below the Employment Standards Act minimums, unconscionability, duress and lack of consideration — meaning that the employee did not receive anything of value in return for the contract, which invalidates any contract of any kind. Those defences are rare.

Over the last few years, however, the courts have stepped in to interpret the contracts themselves and declare them illegal, being contrary, in some aspect, to the Employment Standards Act. And if a termination clause is invalid in any respect (its cause for discharge section, for example), it will be invalid and unenforceable in every respect.

This judicial trend started with an Ontario Court of Appeal case called Waksdale. The company had a clause in its employment contract saying that, if there was cause for discharge, it could dismiss the employee without severance. Virtually all Canadian contracts had such a clause at the time. The problem with that language, the court found, was that even if there was legal cause, unless it rose to the level of the willful misconduct required to pay no severance at all in the Ontario Employment Standards Act, the Act’s minimum statutory severance must still be paid.

So, the termination provision was struck down and employers went back to the drawing board, constructing new termination provisions in their contracts and having employees, old and new, sign them. That is why millions of Canadians have been presented with new employment contracts since that case was decided in 2020.

That did not end the court’s setting aside of employment contracts. One year ago, in a decision called Dufault (recently affirmed by the Ontario Court of Appeal), the court set aside an employment contract which stipulated that an employer could terminate an employee “at any time” upon paying prescribed severance. Again, such a provision, allowing an employer to terminate an employee without cause at any time, was found in virtually every employment contract in the country.

Still, the court retorted, under the Employment Standards Act, an employer cannot dismiss an employee “at any time,” as there are protected times when employees cannot be fired, such as when they conclude a statutory leave or attempt to exercise their rights under the ESA.

Employers again were forced back to the drawing board.

Now, a brand new decision by the Ontario Superior Court earlier this month, Baker v. Van Dolder’s Home Team, looked at a contract with the following “with cause” provision:

“Termination with cause: we may terminate your employment at any time for just cause, without prior notice or compensation of any kind, except any minimum compensation or entitlements prescribed by the Employment Standards Act. Just cause includes the following conduct… (and then listed many forms of misconduct, such as dishonesty and theft).

This contract, too, was struck down — firstly on the Dufault principle, since the “without cause” dismissal provision permitted dismissal “at any time.” But the court also struck it down because of the “with cause” provision, despite the language “except any minimum compensation prescribed by the Employment Standards Act” — language that most lawyers have put in their clients’ contracts since Waksdale.

The reason the court provided was: “The potential unfairness of a termination provision of the sort at issue is that the employer has described in detail the contractual standard of just cause but given no detail or explanation of the ESA’s willful misconduct standard, and that it differs from the contractual standard. Given that many employees will not be familiar with the ESA provisions, many employees would assume that they had no entitlement if they breached the contractual standards.”

In other words, simply referring to the ESA without explaining what it meant was insufficient.

So again, employers must revise their contracts and, as I have been recommending for some time, actually detail the provisions of the ESA, outlining in their contracts when employees will and will not be deprived of compensation.

The other question that arises is: what happens if an employee who is subject to a valid termination clause — specifying what will be paid to them if they are fired without cause — is fired for just cause, but then wins their dismissal case? Is that termination clause still valid?

According to an Alberta case last month, Singh v. Clark Builders, the without cause termination clause will still apply.

The result will be otherwise if the employee was terminated in bad faith, as bad faith conduct in terminating the employee is contrary to the parties’ reasonable expectations, and therefore the employer should be deprived of the protection of its severance provision.

What is the moral of this long story? Most employment contracts are unenforceable and employees should be very suspicious if their employer suddenly asks them to sign a new one. And for employer clients — it is time to do just that.