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Contracting out of the Ontario Employment Standards Act

The Employment Standards Act in Ontario is legislation designed to protect the rights of all workers in the province. Under section 3, the Act specifies that it applied to any employee in the Province of Ontario, or any employee who is performing work outside of Ontario that is “…continuance of work performed in Ontario.” The Act contains numerous protections for Ontario employees, such as limiting the maximum hours of work in a week, providing an entitlement to overtime pay, and creating entitlements such as parental leave, vacation and personal leave. The Act also provides for the employee’s rights in the event of a termination of employment. The Act contains a section that provides for variable notice periods depending on length of service, up to a maximum of eight weeks. The Act also provides for enhanced termination payments, known as severance, where the employer has more than 50 employees or has a payroll that exceeds $2.5 million. Severance entitlements are based on the years of service, and will require payment of one week salary for each year of service.

Many employers have perceived these entitlements as onerous in some circumstances. In order to attempt to avoid such payments, or other obligations under the Act, employers have sought to have employees sign contracts containing provisions which purport to surrender the employee’s rights under the Act. This is generally referred to as “contracting out”. While employees, when seeking to secure the position are willing to sign agreements containing such provisions, they often seek to render those provisions unenforceable when they are terminated. There has been a significant amount of case law in Ontario considering the enforceability of such clauses particularly in light of section 5.1 of the Employment Standards Act that provides that “…no employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void”. In spite of the clear wording of the Act, employers’ counsel have frequently sought to draft contracts which would absolve employers from complying with the statute.

In the leading decision in the Supreme Court of Canada on this issue, in a case known as Machtinger v. Hodge, decided in 1992, that court considered the employment contract of two employees of the same employer. These contracts contained a termination provision which purported to entitle the employer to terminate on two weeks’ notice in the case of one employee and without notice for the other. Both termination provisions resulted in notice that was less than that required by the provisions of the Employment Standards Act.

Both employees were terminated without cause and were given the amount of notice provided for in the contracts. Both commenced actions for greater compensation, arguing that, as the termination provisions in the contracts were contrary to the provisions in the Employment Standards Act, these contracts were void and of no effect. Accordingly, the employees argued that they were entitled to common law notice.

At trial, the judge found that the termination provisions in the contracts were, in fact, null and void as being contrary to the Employment Standards Act. The judge therefore held that the employees were entitled to notice based on the common law, and awarded the plaintiffs seven months and seven and a half months’ notice respectively.

The employer appealed the decision to the Ontario Court of Appeal. That court held that the termination provisions in the contracts were void as being contrary to the Employment Standards Act. However, the Court of Appeal rejected the plaintiffs’ arguments that, as the termination clauses were void, common law entitlement should apply. Rather, in somewhat innovative reasoning, the Court of Appeal held that the intention of the parties was evidenced by the contract terms, even if those terms were void. The Court of Appeal therefore substituted a finding of damages in each case equal to the respective entitlements under the Employment Standards Act.

The employees appealed the decision to the Supreme Court of Canada which allowed the appeal. The Supreme Court specifically rejected the Court of Appeal’s reasoning that the termination provisions in the contracts, although void, could still be looked to for evidence of the parties’ intentions. The Supreme Court reasoned that, as the statute specifically rendered the termination provisions null and void, those provisions could not be relied on as evidence of the parties’ intentions. The Supreme Court of Canada therefore restored the awards of seven and seven and a half months.

In spite of the clear judicial rejection of the attempt to contract out of the Act, employers continue to try and avoid the application of this section of the Employment Standards Act through the use of employment contracts. In a most recent consideration of such an attempt, the Ontario Court of Appeal reinforced the judicial distaste for such efforts. In the decision of Dimson v. K.T.I. Kanatek Technologies Inc., the court entertained an appeal from a dismissal of a motion for summary judgment brought by the employee. In this case, the Plaintiff was the party to an employment contract with the Defendant which provided that the employee could be terminated without cause on payment on the employee’s Employment Standards Act notice entitlement, based solely on the employee’s regular pay. The clause specifically provided that if the employee was entitled to a bonus, or had received a bonus at any time, the amount of that bonus would not be included in the calculation of the termination pay payable under the Act. The contract also provided that the employer was entitled to terminate the employee’s employment at any time for any reason on payment only of the employee’s Employment Standards Act entitlement. The employee argued that the clause was unenforceable as being contrary to the Employment Standards Act in that it sought to contract out of the employee’s entitlement to have his total compensation included in the calculation of his termination pay. The motions judge held that the clause was acceptable and enforceable as it complied with the provisions of the Act in agreeing to provide the employee with his entitlement under the Act. As the employer was not seeking to avoid the provisions of the ESA, the Court of Appeal agreed that the clause should be enforced. The Court of Appeal therefore dismissed the appeal.

The employment contract specifically provided as follows

if at any time Kanatek provides you with a bonus, it will not be included in the calculation of payment for the purposes of this article [providing for termination pay] or as otherwise agreed to or required by the Employment Standards Act.”

The Plaintiff argued that the amounts with respect to bonuses that he had received would not be included in the plaintiff’s termination and severance pay as required by the Employment Standards Act. The plaintiff argued that this was a clear contracting out and therefore was impermissible under the Act. The Appeals court referred to the provision in the agreement that required the employer to pay all payments or entitlements owed to the employee in accordance with the Employment Standards Act.

The court therefore concluded that the clause was in compliance with the Act and denied the employee’s claim. What this line of case law demonstrates the importance of carefully and clearly drafted employment contracts. While employers cannot contract out of the specific provisions of the Employment Standards Act, it is permissible, with the proper wording, to limit an employee’s entitlement to the minimums set by that statute. However, given the clear disapproval of such clauses, careful drafting is always required in order to ensure that the clause will stand up to judicial scrutiny. Legal advice should always be obtained in the preparation of such agreements.

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Earl Altman

Legal consultant at EA Consulting
Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more
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2 thoughts on “Contracting out of the Ontario Employment Standards Act
  • Earl said in his blog post: The Act also provides for enhanced termination payments, known as severance, where the employer has more than 50 employees or has a payroll that exceeds $2.5 million. Severance entitlements are based on the years of service, and will require payment of one week salary for each year of service.

    John… I believe that this is a broad general statement that does not go into the details of what the law specifically says… I believe the statement is just to point out that there is a statutory provision for severance pay under two conditions that the reader must think about in the context of this article… if the article was just about statutory severance I would understand the need for specific reference to what the Act says… however, there would be much more information required than what you just pointed to in your comment… This said, I doubt it is an omission or a mistake in the article that could mislead a reader as you are trying to point out.

  • John Thompson says:

    Earl: I am not aware of any reference in the ESA to Severance being applicable where an employer has more than 50 employees as you (I believe) inaccurately state in the following reference from your article –

    The act references five years of service and a payroll in excess of 2.5 million dollars or where the employer has severed the employment of 50 or more employees in a six-month period because all or part of the business closed are the accurate references to initiate entitlement to Severance. The omission of how the number of 50 affects Severance is misleading and should be corrected for the readers.

    Take care John T.