Why Your Termination Clause Might Not Protect You. What Every Ontario Employer Needs to Know.

If you have employment agreements in place, there is a reasonable chance the termination clauses in those agreements will not protect you the way you think they will. Ontario courts have spent the last several years systematically striking down termination language that employers believed was airtight, and the financial consequences of getting this wrong can be significant.

Here is what you need to know.

The Basic Framework

In Ontario, when you terminate an employee without cause, you owe them notice, either working notice or pay in lieu. There are two sources of that obligation: the Employment Standards Act, 2000 (ESA), which sets out minimum entitlements, and the common law, which can require significantly more depending on the employee’s age, length of service, position, and availability of comparable employment.

Most employers try to limit their exposure to the ESA minimum by including a termination clause in the employment agreement that caps notice at the statutory minimum. For years, this worked. Then the courts started looking more carefully at how those clauses were drafted.

Waksdale v. Swegon North America: The Decision That Changed Everything

In 2020, the Ontario Court of Appeal decided Waksdale v. Swegon North America Inc. and fundamentally changed how termination clauses are interpreted in Ontario.

The employee in that case had been terminated without cause and was paid his ESA minimums. His employment agreement had two termination provisions, one governing termination without cause, and one governing termination for cause. The without-cause provision was arguably reasonable. The for-cause provision, however, violated the ESA because it purported to allow termination for cause without notice in circumstances broader than the ESA permits.

The Court of Appeal held that termination provisions in an employment agreement must be read as a whole. Because the for-cause clause violated the ESA, the entire termination section was void, including the without-cause clause that might otherwise have been enforceable. The employee was entitled to common law reasonable notice instead of the ESA minimum.

The practical impact was immediate and significant. Employers across Ontario suddenly discovered that their employment agreements, many of which had been drafted years earlier using standard templates, contained for-cause language that violated the ESA and therefore rendered their entire termination section unenforceable.

What Makes a For-Cause Clause Invalid?

Under the ESA, an employer can only terminate an employee without any notice or severance in cases of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned.” This is a high standard, higher than the common law standard for just cause, and much higher than what most employers assume.

Clauses that purport to allow termination “for cause” without notice, without specifying that the conduct must meet the ESA’s wilful misconduct standard, routinely fail. Courts have found that these clauses, even if they seem reasonable in practice, create the potential for the employer to terminate without notice in circumstances the ESA does not permit. That potential alone is enough to void the clause.

Dufault v. The Corporation of the Township of Ignace: The Next Step

In 2024, the Ontario Superior Court decided Dufault v. The Corporation of the Township of Ignace, which extended the reach of Waksdale further.

In Dufault, the court found that a termination without cause provision was itself unenforceable, not because of a flawed for-cause clause, but because the without-cause clause gave the employer the right to terminate “at its sole discretion” and “at any time.” The court held that this language, read literally, could permit termination in circumstances that violate the ESA, for example, during a period when an employee is on protected leave. Because the clause could theoretically be applied in a way that violates the ESA, it was void entirely.

The takeaway from Dufault is that termination clauses must not only avoid language that violates the ESA, they must be drafted so that they cannot even theoretically be applied in a way that violates the ESA. This is a demanding standard that many standard-form agreements do not meet.

What This Means for Your Business

If your employment agreements were drafted before 2020, or if they use standard template language, there is a significant risk that your termination clauses are unenforceable under current Ontario law. That means that if you terminate an employee, even with what you believe is a valid for-cause termination, you may be exposed to a common law reasonable notice claim rather than the ESA minimum you thought you had capped your liability at.

Common law reasonable notice can be substantial. For a long-service employee in a senior role, it can reach twelve to twenty-four months or more. The difference between that and the ESA minimum, which is capped at eight weeks for employees with more than eight years of service, is the difference between a manageable termination cost and a significant legal dispute.

What You Should Do Now

First, have your employment agreements reviewed by an employment lawyer who is current on post-Waksdale and post-Dufault case law. This is not a one-time exercise, the law in this area continues to develop and agreements that were reviewed in 2021 may already be out of date.

Second, for any new hires, ensure that new agreements are drafted with current standards in mind, including for-cause language that expressly tracks the ESA’s wilful misconduct standard, and without-cause language that does not give the employer discretion to terminate in ways that could violate the ESA.

Third, consider whether it is worth updating agreements for existing employees. This requires fresh consideration, you cannot simply issue a new agreement and expect it to be binding without offering something in return. An employment lawyer can advise on how to approach this practically.

The cost of getting this right is a fraction of the cost of getting it wrong.

This article is for informational purposes only and does not constitute legal advice. If you have questions about your employment agreements, contact Yombo Grossman Law for a consultation.