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Case study: Why you need to periodically review your employment contract

employment contractA well-drafted employment contract is the best employment law investment an employer can make. It can enhance or expand management’s rights, and it can save the employer thousands of dollars in termination costs.

An employment contract should be reviewed periodically for various reasons. One reason is because judges are refusing to enforce termination clauses if they are not drafted properly.

In a recent case, Covenoho v. Pendylum Ltd.,2017 ONCA 284, Ontario’s highest court concluded a termination clause was not legally enforceable because it might breach the Employment Standards Act (“ESA”) in the future.

The facts

Joss Covenoho signed a one year fixed-term contract with Pendylum Inc. The employer terminated her agreement without advance notice when she had been employed for less than 3 months. The termination clause stated, in part, that the contract could be terminated before the end of the fixed-term “if the Pendylum Client to which you have been contracted terminate[s] its contract with Pendylum for your services”.

Decision by motion judge

The motion judge concluded that since the employee had been employed for less than three months, she was not entitled to any notice of termination. Under the ESA, an employer is not required to provide any notice of employment to an employee during the first three months of employment.

Decision by Court of Appeal

The Court of Appeal reversed the motion judge’s decision and found that the termination provisions were void. It concluded that “the terms must be construed as if (the employee) had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void”. In this case, if Ms. Covenoho had been terminated after three months of work, then the termination clause would have violated the ESA because she could have been terminated without any notice of termination (or any payment in lieu of notice) contrary to the ESA. The court also ruled the employee was entitled to receive the salary that she would have earned for the balance of the fixed-term contract.

Lessons for employers:

1)   Employers should periodically review their termination clauses to ensure they are properly drafted and do not provide less than the minimum standards set out in the ESA.

2)  As I have written about before, it is generally a bad idea to enter into a fixed-term contract. If a fixed term contract must be used, it should include a legally enforceable early termination clause.

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Doug Macleod

Employment and labour lawyer at MacLeod Law Firm
For the past 25 years, Doug MacLeod of the MacLeod Law Firm has been advising and representing employers in connection with employee terminations. If you have any questions, you can contact him at 416 317-9894 or at doug@macleodlawfirm.ca. Read more
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