The Ever-Changing Law of Employment Agreements

As most experienced municipal human resources professionals know, the best way to limit unpredictable and potentially sizeable payouts to a departing employee is to enter into an employment agreement that contains an enforceable termination provision prior to the employee starting work.

The key word here, however, is “enforceable.” Ontario courts tend to be very employee-friendly and seem to constantly find new ways to set aside termination provisions. As two recent cases demonstrate, when the language of a termination provision that seeks to limit the employee’s entitlements on termination to the statutory minimums established by the Employment Standards Act, 2000 (the “ESA”) misses the mark, a court will find that the termination provision is unenforceable and award costly common law reasonable notice in its place.

In Ramotar v. Trader Corporation, a decision issued by the Toronto Small Claims Court on January 15, 2025, the Court confirmed that, if a termination clause in an employment agreement provides for continued insurance coverage during the ESA notice period only if such coverage is available from the insurer, the ESA is breached and the termination provision will be unenforceable.

In that case, the termination provision of the employee’s employment agreement stated:

If your employment is terminated without cause, the Company will continue your group insurance benefit coverage for such period as the Employment Standards Act, 2000 shall require, provided such coverage is available from the insurer. (emphasis added)

The ESA obligates the employer to continue to make the premium contributions required to maintain the employee’s benefits plan(s), if any, throughout the statutory notice period – regardless of any rules or restrictions the insurer may have. This case is therefore a helpful reminder that including language in the termination provision that makes the continuation of benefits conditional in any way during the statutory notice period amounts to a violation of the ESA, which will in turn render the termination provision unenforceable. In this case, given the lack of enforceable language limiting the employee’s entitlements on termination, the employee was awarded an additional eight weeks’ notice.

More recently, on April 3, 2025, the Court of Appeal for Ontario issued a decision finding that the termination provision in an employment agreement was unenforceable because the wording allowed for a possible termination without providing the employee with their minimum statutory entitlements.

In De Castro v. Arista Homes Limited, 2025 ONCA 260, the employer terminated an employee without cause. In her wrongful dismissal action, the employee took issue with the “for cause” termination language in her employment agreement, which read as follows:

If you are terminated for Cause or you have been guilty of wilful misconduct, disobedience, breach of Employment Agreement or wilful neglect of duty that is not trivial and has not been condoned by ARISTA, then ARISTA will be under no further obligation to provide you with pay in lieu of reasonable notice or severance pay whether under statute or common law.

For the purposes of this Agreement “Cause” shall include your involvement in any act or omission which would in law permit ARISTA to, without notice or payment in lieu of notice, terminate your employment.

As the Court of Appeal had earlier established in Waksdale v. Swegon North America Inc., if any portion of a termination provision contravenes the ESA, the entire termination clause must be struck out, even if the employer has not attempted to rely on the unenforceable portion.

The Court of Appeal found in De Castro that the termination provision defined “cause” more broadly than the ESA does. The provision therefore permitted termination without providing the employee with their minimum ESA entitlements in circumstances where the ESA would require such entitlements – for example, in the case of a breach of the employment agreement that was not wilful or serious. Accordingly, the Court of Appeal upheld the motion judge’s finding that the contract breached the ESA and was unenforceable as a result.

Municipalities can best stay ahead of the law and ensure their termination provisions are and continue to be enforceable by ensuring their employment agreements are reviewed by legal counsel regularly – at least every couple of years, and always prior to executing a termination – in order to confirm they take into account all of the latest legal developments. As the above cases demonstrate, a few misplaced words may be enough to render a termination provision unenforceable. By investing the time and resources to create an enforceable employment agreement, municipalities are buying certainty and clarity, and limiting future termination-related expenses.