Future Termination Provisions Violating ESA Deemed Unenforceable

The Ontario Court of Appeal in Covenoho v. Pendylum Ltd. has confirmed that a termination provision in an employment contract that could breach Ontario’s Employment Standards Act (“ESA”) in the future – even if compliant at the time of the employee’s termination from employment – is void and unenforceable.

The Court also confirmed that fixed-term employees who are terminated under an unenforceable termination clause are entitled to the salary they would have earned had they worked to the end of their fixed term.

The Facts

Joss Covenoho, who worked for Pendylum Inc. under a one year fixed-term employment agreement, was terminated without notice or payment in lieu thereof after working less than three months. Pendylum relied on the termination provision in Ms. Covenoho’s employment agreement, which stated that Ms. Covenoho would be provided with no notice for dismissal and that Pendylum would have “no liability to [the employee], save and except to pay any accrued and earned compensation.”

Ms. Covenoho sued, claiming damages equivalent to wages owing under the balance of the fixed term agreement. Ms. Covenoho argued that the termination provision relied on by Pendylum, while not in violation of minimum employment standards legislation at the time she was terminated, would have violated those standards if she had remained employed with the company for more than three months. Therefore, Ms. Covenoho argued that she would have been entitled to notice of termination.

Decision

The lower court found that, since Ms. Covenoho had not worked the prerequisite three months, she was not entitled to any notice of termination. The Court of Appeal took issue with the terms of Ms. Covenoho’s employment agreement, and, in particular, found that the termination provision allowed Pendylum to terminate Ms. Covenoho’s employment without cause or notice. The court ruled that a termination provision must be “construed as if the [employee] had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void.”

Since the termination provision in Ms. Covenoho’s agreement was found to be void, common law termination prevailed, meaning that Pendylum was required to pay Ms. Covenoho to the end of her term (an obligation that is not subject to mitigation). As a result, Ms. Covenoho was awarded $56,000 in damages, representing the wages owed under the balance of the fixed term agreement.

Lessons Learned

The case is a reminder that employers should “look ahead” and ensure that their termination provisions are enforceable, not only at the time of termination of employment, but also in the future assuming that employment continues indefinitely. Failure to do so could have grave consequences as common law notice and common law remedies for fixed term contract breaches can be significant.