If followed, a recent Ontario case could result in the elimination of many specific penalty clauses in employment contracts.
A specific penalty clause states that if an employee engages in a specific behaviour then the employee agrees s/he can be terminated for just cause without any notice or termination pay in lieu of this notice.
Facts of the case
Ms. Henderson worked for a dental practice. The dentists decided to retire and close their practice and provided her with six months working notice after 30 years of employment. The dentists relied on a contract of continued employment that Ms. Henderson signed about 5 years before her termination. This new contract stated, in part:
13. Your employment may be terminated without cause for any reason upon the provision of notice equal to the minimum notice or pay in lieu of notice and any other benefits required to be paid under the terms of the Employment Standards Act, if any. By signing below, you agree that upon receipt of your entitlement under the Employment Standards Act, no further amount shall be due and payable to you, whether under the Employment Standards Act, any other statute or common law.
18. Conflict of Interest. You agree that you will ensure that your direct or indirect personal interests do not, whether potentially or actually, conflict with the Employer’s interests. You further covenant and agree to promptly report any potential or actual conflicts of interest to the employer. A conflict of interest includes, but is not expressly limited to the following: [four scenarios listed]
A failure to comply with this clause above constitutes both a breach of this agreement and cause for termination without notice or compensation in lieu of notice. (Bold print and italic added for emphasis)
19. Confidential Information. You recognize that in the performance of your duties, you will acquire detailed and confidential knowledge of our business, patient information, and other confidential information, documents, and records. You agree that you will not in any way use, disclose, copy, reproduce, remove or make accessible to any person or other third party, either during your employment or any time thereafter, any confidential information relating to our business, including office forms, instruction sheets, standard form letters to patients or other documents drafted and utilized in the Employer’s practice except as required by law or as required in the performance of your job duties.
For clarity, confidential information includes, without limitation, [types of confidential information listed]
In the event that you breach this clause while employed by the Employer, your employment will be terminated without notice or compensation in lieu thereof, for cause. (Bold print and italic added for emphasis)
Were clauses 13, 18, and 19 enforceable and, if not, how much notice of termination was Ms. Henderson entitled to receive?
The judge concluded that clause 13 limiting Ms. Henderson’s entitlement to Employment Standards Act minimums was enforceable however he struck down the termination clause because clauses 18 and 19 permitted the employer to terminate Ms. Henderson’s employment without notice even if it could not prove the breach of these clauses was the result of wilful misconduct, disobedience or wilful neglect of duty that was not trivial and had not been condoned by the employer. [Note: Under the ESA, an employee is entitled to termination pay unless an exemption applies and the above noted wilful misconduct exemption does not have the same meaning as just cause. As a result, it is possible for an employer to prove just cause at common law but not prove the wilful misconduct exemption applies under the ESA. For example, if an employer cannot prove that a breach of the confidentiality clause was wilful then the employee is generally entitled to notice of termination (or termination pay in lieu of notice) under the ESA. Ms. Henderson’s contract provided she was not entitled to any notice of termination (or less than the ESA minimum) if she breached the confidentiality clause whether or not the breach was wilful.]
The parties agreed that if the termination clause was not enforceable then Ms. Henderson should have received 18 months’ notice of termination.
Before this case was decided, the Ontario Court of Appeal found that if one part of a termination clause is unenforceable then the entire clause is unenforceable.
This case takes this concept a step further and finds that if any clause in an employment contract violates the ESA then a properly drafted ESA termination clause will not be enforced.
If this case is followed or upheld on appeal this means that the termination clause in an employment contract with a specific penalty clause could very well be unenforceable.
This case is significant because it is not unusual for American companies operating in Canada (and some Canadian companies) to include specific penalty clauses in their standard employment contracts.
Lesson to be learned
If your organization has a specific penalty clause in its employment contract, then it is time for you to ask your employment lawyer whether or not it needs to be revised or removed from the contract.
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