A 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.
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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