Another termination clause bites the dust?

What’s new about that?

In a recent Ontario case, the court ordered the employer to pay a short-service employee two months of pay in lieu of notice plus $10,000 in punitive damages as punishment for conduct that was found to be “a marked departure from ordinary standards of decent behaviour”.

This case follows the trend we have seen in recent years, with numerous termination clauses being found unenforceable for breach (or potential breach) of the statute and for being ambiguous, as well as extraordinary damages being awarded for the employer’s failure to pay the statutory minimum entitlements or to issue the Record of Employment (“ROE”) in a timely manner.

So what happened in this case?

Facts

In Wilds v. 1959612 Ontario Inc., an executive assistant with approximately four and a half months of service was terminated from her employment without cause and without notice.

The employment agreement contained, in part, the following termination clause:

“(c) Termination Without Cause: We may terminate your employment at any time and in our sole discretion by providing you with written notice and/or pay in lieu of notice.  The notice / pay in lieu to be provided will be two (2) weeks plus any applicable notice and severance requirements in accordance with the Employment Standards Act, 2000 (the “Severance Period”).

If pay in lieu of notice is provided, you will receive only your base salary and employment-related health and dental benefits for the applicable period, save and except for short-term disability, long-term disability, and which will not continue beyond the statutory notice period or as required by applicable employment standards legislation.

You have an obligation to take all reasonable steps to mitigate the loss of your employment.  Your obligation includes an obligation to accept reasonable alternate work offered to you if your position with the Organization ends.

[…]

You agree that in exchange for the notice and/or pay set out herein, you will execute a Full and Final Release, in a form acceptable to the Organization, pursuant to which you will agree to waive any and all claims relating to your employment with the Organization or the termination thereof.

[…]

(e)        Termination With Cause: We may terminate your employment for just cause at any time without notice, pay in lieu of notice, severance pay, or other liability, other than any notice, pay in lieu of notice or severance required pursuant to the applicable employment standards legislation.  For the purposes of this Agreement, just cause includes, but is not limited to:

(i)      a material breach of this Agreement or our employment policies;

(ii)       unacceptable performance standards;

[…]

(x)        repeated, unwarranted lateness, absenteeism or failure to report for work;

(xi)      personal or off-duty conduct (including online conduct) that prejudices the Organization’s reputation, services or morale; or

(xii)      any conduct that would constitute just cause pursuant to common law.”

The employee sued for wrongful dismissal on the basis that the termination clause was unenforceable. The employee also sought punitive damages as well as aggravated and moral damages for mental distress.

Analysis

The court found that the termination provision violated the Employment Standards Act, 2000, as amended (the “Act”), and was therefore unenforceable. In particular, the court held that the termination clause was flawed in the following ways:

• It stated that if the employee was terminated without cause, she would receive two weeks’ notice or pay in lieu of notice, in addition to any applicable notice and severance requirements under the Act. The court found that this clause violated the Act, since it limited her entitlements to base salary and certain benefits, excluding other compensation and benefits such as vacation pay, bonus, life insurance, and accidental death and dismemberment insurance. The company thus breached sections 60 and 61 of the Act.
• It required the employee to execute a full and final release in a form acceptable to the company in exchange for pay in lieu of notice. This is a violation of the Act as the statutory minimum requirements must be fulfilled regardless of whether an employee signs a Release.
• It stated that the employee could be dismissed for cause without any entitlements under the Act, and defined the conduct that could constitute just cause as broader than the statutory exemptions. For example, it included “a material breach of this Agreement or our employment policies”, “unacceptable performance standards”, and “repeated, unwarranted lateness,” which do not necessarily meet the statutory exemptions: “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and that has not been condoned by the employer”.
• The saving clause could not “save” the employer’s attempts to contract out of the Act. The termination clause contained contradictory language, stating that statutory entitlements would be provided and then clearly violating the Act, which created ambiguity and confusion.

Since the employer could not rely on the termination clause, the employee was entitled to reasonable notice or pay in lieu thereof at common law. The court found that two months of notice or pay in lieu of notice was appropriate.

The court also found that the employer’s violation of the Act and its reprehensible conduct justified an award of $10,000 in punitive damages. The court held that the following conduct of the company was reprehensible: repeatedly failing to pay the employee her minimum entitlements under the Act, issuing her ROE late, and not reimbursing her for legitimate business expenses incurred during her employment. The company took no steps to rectify the situation even after it was repeatedly informed of its failure. As a result, the court found that punitive damages were necessary to punish the employer and deter future misconduct.

Although the employee sought aggravated and moral damages for mental distress, the court dismissed this claim as she provided no particulars or evidence (such as medical records or documentation of financial hardship).

In total, the court ordered the employer to pay close to $20,000 to the employee, including wrongful dismissal damages as well as punitive damages.

Key takeaways

This decision fits in with the current trend of termination clauses being found unenforceable for breach (or potential breach) of the statute and for being ambiguous, as well as extraordinary damages being awarded for the employer’s failure to fulfill its legal obligations post-dismissal. It serves as a strong warning for employers to ensure that they have proper employment agreements in place with enforceable termination clauses. In particular, employers would be wise to comply with their legal obligations, not only in drafting termination clauses but also in the process of dismissing employees (e.g. providing the statutory entitlements and issuing the ROE in a timely manner). Otherwise, employers can be on the hook for substantial damages.

By Nadia Zaman