We have written previously about the dangers of using fixed term employment agreements. In that regard, the Ontario Superior Court of Justice has recently provided another cautionary tale for employers: Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 4522.
The facts in Tarras are common for fixed term contract cases: in the context of a sale of business, a vendor-owner contracted with the purchaser to remain on as an employee post-transaction. The parties negotiated a three-year term. For this period, the vendor-owner would work as a Vice-President and be paid a base salary of $250,000.00 per annum.
The parties attempted to provide for early termination of the fixed term. Specifically, their contract included the following provisions:
(a) Termination for Cause. TMIG may terminate Employee’s employment hereunder for “Cause” immediately upon delivery of a written termination notice to Employee. “Cause” means the repeated and demonstrated failure on Employee’s part to perform the material duties of his/her position in a competent manner, which Employee fails to substantially remedy within a reasonable period of time after receiving written warnings and counseling from TMIG; Employee engaging in theft, dishonesty or falsification of records; Employee willful refusal to take reasonable directions after which Employee fails to substantially remedy after receiving written warnings from TMIG; or any act(s) or omission(s) that would amount to Cause at common law. In the event that Employee’s employment hereunder is terminated pursuant to the provisions of section 11 (a), Employee shall not receive payment of any kind, including notice of termination or payment in lieu thereof, or severance pay, if applicable, save and except accrued and outstanding salary and vacation pay.
(b) Termination Without Cause. TMIG may terminate Employee’s employment in it’s sole discretion for any reason whatsoever without Cause or upon expiry of the Term, by providing Employee with notice of termination, or payment in lieu thereof, or a combination of both, and severance pay, if applicable, pursuant to the Ontario Employment Standards Act, 2000. In addition, TMIG will continue to pay its share of employees benefits, if any, for the duration of the notice of termination, pursuant to the employment standards act of 2000. TMIG will also provide Employee any accrued and outstanding salary and vacation pay.
Two things immediately stand out in the above language. First, the inclusion of a common law “cause” clause allowing the employer to immediately dismiss the worker absent any notice or pay-in-lieu requirement. Second, the “without cause” provision provides only for statutory minimums – resulting in the employee having the lowest possible severance entitlement permitted by law.
The fixed term contract was drafted with participation of the employee. It is unclear why he did not bargain a better “without cause” entitlement. As a vendor-owner, the employee likely had somewhat greater bargaining power than that enjoyed by a typical worker.
Regardless, a little more than one year into the parties’ fixed term, the employer terminated the agreement. The employee was provided with slightly more than one month’s notice. In response, the employee sued and sought payment for the balance of the fixed term.
Wrongful dismissal and $497,000.00+ in damages
On a motion for summary judgment, the employee contended that the language provided for in the “cause” termination clause was in violation of the minimum protections of the Employment Standards Act, 2000. This is a somewhat technical argument, relying on the distinction in the meaning between “cause” as understood by the common law, and the relevant statutory threshold (i.e. “wilful misconduct”) to dismiss a worker without obligation.
Justice Smith accepted the employee’s position, concluding:
Termination in accordance with the provisions of the ESA, and termination for an act or omission that would amount to cause at common law, are two different notions.
The common law meaning of cause is frequently a much lower standard than that of the ESA.
The termination provisions of the agreement in this case…are clearly in conflict with the provisions of the ESA as they provide a lower standard for termination. As in Waksdale, the fact the parties in this case did not rely on the illegal provisions in section 11(a) is irrelevant and of no moment. The presence of the offending clauses in s. 11(a) renders the entirety of s. 11 of the agreement void and unenforceable. [emphasis added]
In an attempt to defend itself, the employer had pointed out that the employee:
- had a direct hand in drafting the fixed term contract;
- worked with his own legal counsel during negotiation of the agreement;
- was a man of considerable commercial knowledge and experience; and
- did nothing to look for new work post-dismissal, thereby asking the court to provide him with a windfall payment.
None of these arguments held sway with Justice Smith. Instead, the Court noted that it was improper to allow “subjective considerations” to override the plain language agreed by the parties. As the termination clause on its face violated employment standards, the contextual factors pointed out by the employer were of no consequence.
When we last wrote about fixed term contracts, we noted:
In most situations, a contract of indefinite employment will work just as well (if not better) than a fixed-term contract. Indefinite agreements typically come with less risk, as there is no possibility that severance can be ordered to the end of the applicable term in situations of a wrongful or constructive dismissal.
This advice still holds. Fixed term contracts are an inherently risky proposition for any employer. There are few situations where they will be preferable to traditional indefinite term agreements. This is all the more true today, as Ontario courts continue to find more and more termination clauses unenforceable. Employers need to be aware of this danger and think twice before agreeing to any fixed term relationship.
- Process matters: understanding the procedural duty to accommodate - November 18, 2022
- Fixed term contracts strike again - October 14, 2022
- Termination clause update: ousting the common law and the danger of fixed penalties - September 16, 2022