Illegal Termination Provision Entitles Terminated Employee to Payment for Entire Fixed-Term Agreement
February 22, 2023
Since being released, Ontario courts have applied Waksdale v. Swegon North America Inc., 2020 ONCA 391 (“Waksdale“) and held that where a ‘for cause’ provision violates the Employment Standards Act, 2000 (“ESA“), all clauses in the employment contract are void and unenforceable, thus entitling employees to full common law notice. This was no different in Tarras v Municipal Infrastructure Group Ltd., 2022 ONSC 4522 (“Tarras”), where an invalid for cause provision made the entire contract unenforceable.
The plaintiff Tarras was a professional engineer and one of the former owners and directing minds of the defendant, The Municipal Infrastructure Group Limited (“TMIG”). Tarras and the other former owners of TMIG sold their interest in the company in December 2019, by way of a share sale to T.Y. Lin International Canada Inc.
At the time of the share sale, Tarras negotiated a three-year fixed-term employment agreement that would see him become a vice-president until December 2022.
As per the termination provisions within the contract, TMIG could terminate Tarras for cause where there was repeated and demonstrated failure on his part to perform the material duties of his position in a competent manner and he failed to remedy those issues within a reasonable time period after receiving warnings and counseling from TMIG; where he engaged in theft, dishonesty or falsification of records; where he wilfully refused to take reasonable directions; or for any act or omission that would amount to cause at common law. The contract further stated, if Tarras was terminated for cause, he would 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. As per the contract, TMIG could also terminate Tarras’ employment without cause by providing him with notice of termination, or payment in lieu thereof, or a combination of both, and severance pay, if applicable, pursuant to the ESA.
On November 25, 2020, Tarras was terminated without cause and provided working notice until December 31, 2020. Tarras issued a claim for breach of contract/wrongful dismissal and brought a Rule 20 motion for summary judgment.
In finding the termination clause in Tarras’ employment agreement to be unenforceable, the court noted that the for cause provision in Tarras’ contract could allow for his employment to be terminated for conduct that met the common law standard of cause which is much lower than the ESA standard of 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 Court further commented that Ontario courts, including Waksdale, have repeatedly held that any provisions in the termination clause of an employment agreement that contravene the provisions of the ESA, or which provide an employee less than their ESA statutory entitlements for conduct lower than the standard set by the ESA renders the entire agreement void.
Counsel for TMIG argued, among other things, that Tarras had the benefit of legal counsel during negotiations and was himself sophisticated. The Court rejected these submissions and also found it irrelevant that the parties did not rely on the illegal provisions noting that it would be an error of law to allow such factors to override the plain wording of the agreement.
The Court went on to find that as the termination for cause provisions conflicted with the ESA in providing a lower standard for termination, the entire agreement was void and unenforceable and Tarras was therefore entitled to payment arising from the termination of his employment with TMIG in an amount equal to his salary, vacation pay, the proceeds from the incentive compensation plan, and all other employee benefits, for the unexpired term of the employment agreement. Turning its attention to mitigation, the Court added that Tarras had no obligation to mitigate his damages as he was terminated from a fixed term contract.
In another example of where the law has progressed since Waksdale, expect more contracts involving faulty termination provisions to meet the same fate.