Many businesses opt for fixed-term contracts or independent contractor agreements believing that they can better manage their risk exposure. Some believe that using fixed-term contracts simplifies the process of ending employment without cause, as they can merely allow the contract to expire. Others view independent contractor agreements as a way to reduce both the risk of non-compliance with employment standards and the need for statutory deductions and withholdings. Combining both approaches and utilizing a fixed-term independent contractor agreement might also seem advantageous. Unfortunately, unless executed meticulously, any fixed term contract will actually expose businesses to significant risk.

Importance of a valid early termination clause

A recent ruling from the Ontario appeal court, Monterosso v. Metro Freightliner Hamilton Inc. (“Monterosso”), serves as a warning of the potential pitfalls of a badly executed fixed term contract. The court upheld a substantial damages award exceeding $600,000 in favor of a contractor whose 72-month contract was unceremoniously terminated after just seven months. The primary reason for this significant award was the absence of a valid termination clause in the contract.

The court’s judgment was unequivocal: the contract explicitly specified a fixed term without any provisions for early termination. Consequently, the contractor was entitled to compensation equivalent to what would have been earned during the remaining 65 months of the contract. The Court of Appeal also distinguished between employment fixed term contracts and contractor fixed term contracts, and accepted the business’s  submission that the contractor had a duty to mitigate the termination of the contract. However, ultimately the  business did not have sufficient evidence to prove the contractor’s failure to mitigate damages and the alleged modification of contract terms through email correspondence. A properly drafted early termination clause would have prevented this costly result. This case underscores the importance of meticulously drafting fixed-term contracts.

Failure to track expiration dates can be costly

Furthermore, employers must exercise caution when utilizing fixed-term employment contracts for extended durations or continuous work. Keeping track of the expiration date of a fixed-term employment contract can be challenging. If an employee continues to perform their duties beyond the contract’s expiry date, even for a day, the employment will have been inadvertently converted to indefinite term employment. This, in turn, renders the safeguards outlined in the written contract ineffective. Moreover, if an employer routinely renews fixed-term contracts, the court may perceive that it is an indefinite term working relationship, effectively nullifying the benefits of a fixed-term contract. This could potentially obligate the employer to significant termination payouts.

Contract worker vs. employee

Another critical risk for business lies in the possibility of contractors being reclassified as employees. It is imperative to understand that the determination of worker status hinges on the actual nature of the parties’ relationship. As explained in Keenan v. Canac Kitchens, the language contained within the contract cannot be relied on if in fact the relationship is that of employer and employee. If that is the case, even a well-crafted independent contractor agreement may not shield an employer from reclassification. Such reclassification can lead to severe financial consequences, including obligations for additional taxes, CPP contributions, EI premiums, vacation pay, overtime pay, and even termination and severance pay. Particularly in cases where such a working relationship has endured for several years, the financial burden on employers, both in terms of compensating workers and satisfying the Canada Revenue Agency, can be substantial, with limited recourse for indemnification from the employee.

Mitigating the risks

To mitigate these substantial risks, businesses must take proactive steps to ensure that their contractors genuinely meet the criteria for independent contractors. A written independent contractor agreement  clearly defining the nature and terms of the working relationship  must accurately reflect the actual practices and conduct of both parties involved. An enforceable early termination clause is indispensable.

For a fixed-term employment contract, businesses should first think about whether it is one of the situations to use a fixed-term contract instead of a permanent contract. For example, the employee is here for a specific project or to step in for a person on leave; second, the contract needs a valid early termination clause and is in compliance with applicable employment standards legislation; and Diligent contract administration, especially regarding expiration dates, is absolutely crucial.

The court, in Monterosso,  also clarifies that, although the burden of proof lies with the employer to demonstrate the worker’s failure to mitigate damages, there exists a reciprocal obligation on the part of the worker. When fixed-term independent contractor agreements are prematurely terminated in accordance with contract terms, workers may have a duty to actively seek and accept comparable income opportunities. Failing to do so can result in a reduction of their entitlement to damages.

While fixed-term contracts may serve as valuable tools for businesses requiring temporary or project-based work from independent contractors, businesses must recognize that such agreements can expose businesses to considerable liability and risk. businesses should consult with experienced employment lawyers before implementing fixed-term contracts.

Termination clauses may be the most litigated clause of employment agreements. Drafted correctly and updated regularly, termination packages can be limited to employment standards minimums. Drafted incorrectly or not regularly reviewed, and the employer relying on that clause is in for a costly surprise!

Because employment agreements, including termination clauses, are drafted by employers, any ambiguity or lack of clarity will be interpreted as a matter of law in favour of employees.

Why is this important? One of the most common misunderstandings about termination pay is the belief that as long as the termination package is in accordance with the Employment Standards Act, 2000 (“ESA“), employers have fulfilled their obligations with respect to termination pay under the law. That is not necessarily true. A good employment lawyer could prove that ESA terms are not enough because many termination clauses do not stand up in court. This can quadruple damages. What was 8 weeks termination pay could turn into 8 months.

In addition to an employers’ statutory obligations upon termination under the ESA, employers also have an obligation under the common law. Upon termination, the common law requires an employer to give employees sufficient common law reasonable notice or pay in lieu thereof. This is usually much higher than the minimum obligations under the ESA. A long-term employee may be owed up to 24 months of salary and benefits. There is no straightforward equation to calculate the amount owing under Common law. It is a case-by-case decision with multiple factors to be considered. As a result, its exact length or amount becomes another source of dispute upon termination.

This is where the termination clause comes into play.

The importance of the termination clause

Common law requires more than the minimum entitlements under the ESA, and it is less certain. However, a well-drafted employment agreement can set up a straightforward equation to calculate termination pay via the termination clause. It provides certainty that reduces the possibilities of dispute, and it may help the employer to reduce termination costs significantly. That is why an enforceable termination clause is important to employers. You want to pay 8 weeks, not 8 months or 24 months for a long-term employee.

Well drafted termination clauses limit employees’ entitlements under the common law. As employees are perceived as the weaker party in employment negotiations, judges have been scrutinizing termination clauses under a microscope. Vaguely written termination clauses could easily be nullified if they are inconsistent with the ESA. In many cases, this increases employee entitlements exponentially.

Termination clauses tested in the courts

One of the most recent examples where a termination clause did not hold up in court is the Waksdale decision. In this case, the court ruled that if the termination for cause provision is invalid, it will nullify the entire termination clause, including otherwise perfectly drafted termination without cause provisions. This shows any mistake made in the termination clause could jeopardize the entire clause and will cost employers unexpectedly upon termination.

The expenses upon termination may become even more unexpected when an employee has group benefits and other kinds of compensation in addition to salary, such as commissions, bonuses, incentive payments, options, deferred benefits sharing plans, or otherwise. If the termination clause is not properly drafted, employees will be entitled to those compensations or damages for those compensations, even if the employee is not actively employed during the notice period.

In a recent case, Rahman v. Cannon Design Architecture Inc., the judge decided that the employee was more sophisticated because they had the assistance of legal counsel while negotiating the employment contract. In this case, the court gave more leeway to the employer and enforced the termination clause. However, this decision is an outlier of the court’s long-standing position, and another judge has already refused to follow it.

Recent changes to note

We also remind you that the Ontario government passed Bill 27, Working for Workers Act, 2021 (Bill 27). Bill 27 outlines an employee’s “right to disconnect” and essentially prohibits the use of non-compete clauses in employment agreements with two limited exceptions. Employers will need to create “right to disconnect” policies. It is also necessary to review all post-termination restrictive covenants to ensure that they have enforceable provisions. This ensures protection of legitimate interests if the non-compete covenant is no longer enforceable.

If you need guidance from an experienced employment lawyer, call Hum Law today at (416)214-2329 or email info@thehumlawfirm.ca.

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Every once in a while, a court decision comes along that completely changes how contracts will be drafted going forward.  We’ve seen how game-changing decisions on the wording of termination “without cause” provisions, and bonus and additional compensation entitlement provisions, have sent employers scrambling to rewrite the terms of their employment agreements and compensation plans.

On June 17, 2020, another game-changing decision was released by the Court of Appeal in Waksdale v. Swegon North America Inc., 2020 ONCA 391 (“Waksdale”), where it overturned a dismissal of a claim.

The employer had terminated the plaintiff and relied on the termination without cause provision of the employment agreement.  This basically provided for minimum entitlements under the Employment Standards Act, 2000 (“ESA”), plus one week, rebutting the presumption of common law reasonable notice.  The plaintiff sued for wrongful dismissal, arguing that the presumption of entitlement to common law reasonable notice had not been rebutted, since the termination with cause provision in the agreement was invalid, therefore all the provisions relating to termination should be invalidated, even if the without cause provision might be independently enforceable.  The plaintiff also argued that the employment agreement’s severability clause should not be effective to sever the unenforceable provisions from the valid provisions.

The Court of Appeal agreed with the plaintiff, and found that this employee was entitled to common law reasonable notice.  The case stands for a broader proposition that the presumption of reasonable notice can only be rebutted if all the provisions of the entire termination clause comply with the ESA.   If any of the provisions of the entire termination clause fail to comply with the ESA, then all its provisions will fail.

It does not matter if (1) the termination clause is broken down into different clauses within the employment agreement; (2) there is a severability clause in the agreement which severs the illegal clauses from the rest of the agreement; (3) the employer does not rely on the breaching provision; or (4) the employer’s subsequent behaviour complied with the ESA.

What does this mean for employers?

Historically, a validly written termination clause in employment agreements has been an effective way to control the termination costs for employers.  The focus had been on tight drafting of the “without cause” termination clause in employment agreements, which were used to rebut the common law presumption of reasonable notice, independent of the validity of termination “with cause” provisions.  Prior to Waksdale, such an approach had previously been upheld:  Khashaba v. Procom Consultants Group Ltd., 2018 ONSC 7617.

This decision will impact the vast majority of written employment agreements, and thereby significantly affect many employers’ risk management strategies.

More significantly, in these challenging pandemic and post-pandemic times, as businesses struggle to survive, the consequences from the Waksdale decision could be devastating, especially after the pandemic-related emergency leave is no longer available.  Since many businesses are not immediately bouncing back to full capacity as emergency restrictions are lifted, restructuring or employment terminations are inevitable.   Employers may be hit with unanticipated hefty costs when terminating employees, which could tip the scale from just being able to recover to insolvency.

Moving forward – with better employment contracts

All employers are urged to have their employment contracts reviewed, in light of this game-changing Court of Appeal decision, and to thereafter have their contracts reviewed once a year, to take into account other developments in the law.

If you are uncertain whether the Waksdale decision affects your employment agreements, negatively or you would simply like to speak with an employment lawyer about your employee contracts moving forward, contact Hum Law Today.  We are employment law experts well-versed in drafting employment contracts.