Almost all employment contracts include a termination clause. Yet, not all termination clauses are enforceable. The consequences of this can be severe for an employer. This is well exemplified in the 2022 Ontario Superior Court decision, Tarras v. The Municipal Infrastructure Group Ltd.
Background:
In late 2019, Plaintiff, Mark Andrew Tarras, agreed to a three-year, fixed-term employment contract with Defendant, The Municipal Infrastructure Group Limited (“TMIG”), which made him a Vice-President. In November of 2020, Mr. Tarras was dismissed without cause, effective December 31st, 2020. This meant his salary and benefits were terminated as of December 31. The focus of this case was the provisions in his termination clause, as well as the question of a fixed-term contract.
The Termination Clause:
In Ontario, the Employment Standards Act (“ESA”) sets out minimum standards that an employer must meet. The employer and employee cannot contract out of these standards, even if they’ve agreed to do so. Any provision that contracts out the minimums set out in the ESA is simply void.
The Ontario Regulation that was enacted pursuant to the ESA provides in two different sections that there is no entitlement to notice of termination or severance pay for an “employee who has been guilty of willful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer.”
The ESA standard is considered to be a higher bar for termination for cause than the common law meaning of cause. The wording used in the termination clause in this decision, does not meet to the standard required by the ESA. Ontario courts have repeatedly found that if a specific provision does not meet the legislated minimums, it will render the entire termination clause void. Therefore, even though the Mr. Tarras was dismissed without cause, the legality of the entire termination clause is called into question due to the illegal termination ‘for cause’ provision.
The sophistication level of the parties also does not matter when it comes to the requirement of meeting minimum standards. In this case, both parties co-authored the drafting of the agreement, and the plaintiff had legal counsel throughout. However, having a good understanding of the law does not allow one to contract out of minimum employment law standards. Even though both parties drafted the agreement together, their language did not meet the ESA standard of ‘cause’ which requires wilful misconduct.
Thus, the termination clause is unenforceable due to the ‘cause’ provision falling short of the minimum standards set out in the ESA. It did not matter that the parties co-authored the agreement, nor did it matter that the Plaintiff had legal counsel. The parties may have met the common law standard, but they did not meet the ESA requirement.
Fixed-Contract and Illegal Termination Clauses:
Once it was established that the termination clause was unenforceable, the court had to determine what the appropriate notice period was. To do so, there had to be a decision on whether this employment agreement was a fixed-term contract or not. The agreement in this case provided for “a term of three (3) years” with an end date of December 2, 2022. Thus, the court decided it was an unambiguous, fixed-term agreement.
If there is an unenforceable termination clause in a fixed-term employment contract, the employee will be awarded damages at common law. In 2016, the Court of Appeal found that:
In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation.
As the Court of Appeal also pointed out, the entitlements to the employee are not subject to mitigation. Dismisses employees have no duty to mitigate if they are terminated from a fixed-term contract.
Takeaway:
In summary, Mr. Tarras was dismissed without cause, but because the ‘cause’ provision only met the common law standard, not the ESA standard; it rendered the entire termination clause unenforceable. Therefore, the Plaintiff was entitled to common law notice, which in the case of a fixed-term agreement, is the remainder of the contract. Ultimately, Mr. Tarras was awarded the balance of his deal – 23 months’ salary – which amounted to $479,166.67.