The COVID-19 pandemic has resulted in numerous developments in workplace law in Ontario and understandably, there has been a great deal of focus on such developments. However, contractual termination provisions in employment agreements remain a pivotal part of workplace conflict, which should not be forgotten because of the pandemic. In this blog, we discuss a recent decision in this ever-evolving body of law. Both employers and employees should pay attention to this case given this subject matter’s importance.
It has been established that a termination provision in an employment agreement may be void if it could potentially breach the Employment Standards Act (“ESA”). To be clear, this does not mean that there has to be an actual violation of the ESA. All it means that if a termination provision could hypothetically breach the ESA sometime in the future then the termination provision is void.
The facts of the matter of Rutledge v. Canaan Construction Inc., 2020 ONSC 4246, were not in dispute. In October 2019, Honourable Deputy Justice Pettipierre of the Ontario Superior Court of Justice Small Claims Court awarded Chris Rutledge (“Rutledge”) an amount for wrongful dismissal. Rutledge was a construction worker who had worked for the employer Canaan Construction Inc. (“Canaan”) from 2012. He was laid off from time to time by Canaan, as is common in the construction industry. However, sometime during the course of his employment with Canaan, Rutledge signed an employment agreement. The termination provision in that employment agreement sets out that Rutledge was not entitled to notice or pay in lieu thereof, benefits or severance upon termination.
It is important for the readers of this blog to understand that under Ontario’s ESA, construction employees are not entitled to notice of termination or termination pay. They are entitled to severance pay under the ESA. However, a construction employee (in fact, any employee really) is only entitled to severance pay in certain situations such as when the employee has been working for at least 5 years and the employer has a payroll of at least $2.5 million. In another instance, the employee may be entitled to severance pay in the event of a mass termination when the employer dismisses at least 50 of its employees. None of those scenarios was actually applicable to Rutledge’s case. Canaan did not dismiss 50 employees nor did Canaan have a payroll of at least $2.5 million.
In any event, sometime in 2017, Rutledge was laid off again by Canaan and he was not recalled back to work. He was able to mitigate his damages for the most part by finding alternate employment.
In June 2018, Rutledge commenced a small claims court action against Canaan seeking damages for wrongful dismissal. Canaan’s defence to those claims were that the employment agreement would disallow Rutledge’s claims. Canaan argued that Rutledge was a construction employee and, as such, that Canaan was under no obligation under the ESA to give Rutledge notice or pay in lieu thereof. However, Honourable Deputy Justice Pettipierre disagreed with Canaan and found that Rutledge was entitled to damages. Canaan appealed this decision and lost the appeal.
The appeal judge sets out that there is a strong common law principle that an employer cannot contract out of a standard under the ESA. It is here again that we feel that the readers of this blog may need some clarification. The ESA requires that certain minimum entitlements be provided to employees at the time of termination. These statutory entitlements are things like notice of termination or pay in lieu thereof, continuation of benefits and severance pay, etc. The employer cannot contract out of these entitlements. The entire termination provision of the employment contract will be void if the employer provides less than these statutory entitlements. If that termination provision is declared void then the employee may seek damages under the common law. In almost every case, the common law will provide a greater benefit than the statutory entitlements under the ESA. What is important to understand is that the provision is judged on its wording not on whether or not the employer is actually acting in breach of the ESA.
Thus, the appeal judge went on to set out that presently Canaan’s termination provision in the employment agreement did not violate the ESA. However, the court named two hypothetical violations if certain circumstances came to pass. The first possible future violation of the ESA was that while Rutledge was now a construction worker, he might not be in the future. His employment with Canaan may change into something other than a construction worker. If that was to be the case sometime in the future, then he would be denied his entitlements under the ESA given the wording of the termination provision of his employment agreement with Canaan. As such, the termination provision was void.
The second hypothetical violation was that if Canaan were to grow in size sometime in the future so that it would either have more than 50 employees and then discontinued its business, or else had a payroll more than $2.5 million, Rutledge could then be entitled to receive severance pay. As such, the termination provision was again void.
Employers need to think carefully about their employment agreements. Even a potential violation of the ESA will cause a termination provision to be void, however remote. That is a key factor to note for employers. The courts seem to be looking for any possible hypothetical violation and do not assess the likelihood of a hypothetical violation. If that violation can exist then it will be used to render a termination provision void thereby entitling the employee to their presumptive common law rights.
Employers should ensure that an employment lawyer reviews their employment agreements thoroughly in order to minimize any potential violation in the ESA in order to avoid that the termination provision being rendered void and unenforceable by a judge.