Employers face conundrum after Ontario decision

Employment contracts now put in doubt

Workplace Law

As result of a decision last week of the Ontario Court of Appeal, most employees bound by employment contracts can breathe a collective sigh of relief. But for employers concerned about excessive severance costs? Back to the drawing board.

When Harley Davidson bought the assets of its Canadian distributor, Fred Deeley Imports, Deeley terminated all its employees, including Julia Woods. Woods had signed an employment contract with Deeley the day after she started, entitling her to “two weeks’ notice or pay in lieu thereof” for each year of employment, as her sole entitlement.

Woods had been offered the job eight years earlier and accepted it over the phone. She was sent an email outlining the terms, started working the next week and signed an employment contract on the following day. Woods challenged the contract as being unenforceable because she signed it after she started employment. If, after an employee starts working, they sign a contract with a material new term, that contract is indeed unenforceable. In this case, however, the email confirmation, received before she started working, had the same severance provision and other provisions as the contract she later signed. Therefore the fact it was signed after accepting employment did not render the contract unenforceable. Although the contract was not struck down by the court on that basis, the case still serves as a useful reminder to employers to ensure that all terms are confirmed with the employee when they are offered the job. Waiting beyond that and then attempting to impose a severance provision, non-compete clause or any other significant new term will simply be too late.

Although Deeley won on that point, the contract was still struck down. The court noted that employment contracts are interpreted differently than other commercial agreements because of the importance of employment to people’s lives, their vulnerability at the time of dismissal and the general inequality of bargaining power between employers and employees. As result, the court held that if an employment contract could be interpreted in more than one way, a court should interpret it in the employee’s favour.

Based on this general view of employment contracts, the court came to two significant conclusions:

1) If an employment contract does not provide for the continuation of benefits for the statutory period in employment standards legislation, the termination clause will be invalid. Woods’s contract provided for “two weeks’ notice or pay in lieu thereof for each year of service” and noted that “the company shall not be obliged to make any payments to you other than those.” Since the contract therefore did not require benefits to be continued, the contract was rendered unenforceable as not meeting the requirements of the Employment Standards Act; and

2) Employees in Ontario with over five years’ service working for employers with payrolls of over $2.5 million must receive severance pay. Severance cannot be replaced by working notice. Analogous provisions exist in employment standards legislation in the other provinces.

Woods’s contract allowed for only notice to be provided without additional severance. Therefore it did not comply with employment standards legislation and the contract was rendered unenforceable for that reason as well.

The fact that Deeley in fact continued Woods’s benefits and paid statutory severance did not save this invalid clause. Woods was therefore able to void the contract and sue for nine months’ wrongful dismissal damages.

In my experience, most Canadian employment contracts do not provide for continuing benefits. Similarly, most Canadian employment contracts permit termination on notice or pay in lieu thereof. As result of this decision, a huge majority of Canadian employment contracts have just been rendered invalid.

Since the vast majority of employment contracts favour employers, this has just opened the doors of wrongful