Ontario Court Emphasizes Importance of Well-Drafted Contracts for Employers

Ontario Court of Appeal reminds employers of the importance of well drafted contracts

The recent Ontario Court of Appeal decision in Covenoho v. Pendylum Ltd., 2017 ONCA 284 has reminded employers that without well drafted employment contracts they can be held liable for significant payments in connection with the termination of an employee’s employment.

The case involved the employment by Pendylum Ltd. of an individual on a one-year contract.  Pendylum proceeded to terminate the employment of the individual prior to them having worked for the company for three (3) months because the contract with contract ended.  The company specifically terminated the employee’s employment without any payment or notice, relying on the following language from the contract:

2.1 The term of this Agreement will commence on the date of this Agreement and will continue in full force and effect unless the Agreement is terminated as follows:

(a) immediately by PENDYLUM providing written notice to you if you violate or fail to honor any of these provisions of this Agreement or fail to perform your duties as set out in Appendix A in a satisfactory manner as determined by PENDYLUM (known as Cause); or if the PENDYLUM Client to which you have been contracted terminate[s] its contract with PENDYLUM for your services; OR

(b) by either party providing written notice of at least two (2) weeks to the other.

2.2 In the event of termination, we will have no liability to you, save and except to pay any accrued and earned compensation up to and including the date of termination.

2.3 Upon termination or expiration of the agreement, you agree to return and/or destroy all confidential information and copies and sign an undertaking that all Confidential Information has been returned and/or destroyed.

The former employee brought a motion at court arguing that the termination provision was not enforceable and that she should be paid out the rest of the contract.  The motion judge disagreed, stating that the former employee was not entitled to notice as the Ontario Employment Standards Act (“ESA”) does not require notice for less than 3 months’ service.

The Ontario Court of Appeal overturned the decision.  In doing so, the court held that the termination clause was not enforceable because it could result in an employee not receiving enough notice of termination.  Specifically, the way the contract was drafted meant that an employee could have been terminated after 3 months of service and still have received no notice.  This would constitute a violation of the ESA since employees who work for an employer for at least 3 months are entitled to at least 1 week of notice or pay in lieu of notice.

In making its decision, the court specifically stated the following:

In determining whether the contract is in compliance with the ESA, the terms 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. [emphasis added]

The court also made it clear that, in the case where there is no enforceable termination clause on a fixed-term contract, the employee would be entitled to be paid out to the rest of the contract.  The employer was therefore ordered to pay the rest of the contract which was equal to approximately $56,000.00.