Canada: Employer Can't Refuse To Comply With Termination Clause And Later Argue It's Enforceable, Court Rules

A recent decision of the Ontario Superior Court, Perretta v. Rand A Technology Corporation, 2021 ONSC 2111, suggests that employers run the risk of being found to have "repudiated" an otherwise valid employment agreement if they fail to comply with the termination provisions of that agreement.

Repudiation of employment agreement by employer noncompliance

In the decision, the employee signed an employment agreement that contained a termination clause. Arguably, the termination clause went above and beyond the employee's minimum termination entitlements under the Employment Standards Act, 2000 - specifically, it stated that she would receive those minimum entitlements (whatever they happened to be) plus an additional two weeks' pay. Such ESA "top-up" clauses are common in Ontario.

The clause, as written, was intended to replace the employee's entitlements to common law "reasonable notice" of termination. However, the employer got itself into trouble when it terminated the employee and, instead of complying with the termination clause, offered the employee the following: (1) the employee would receive her minimum ESA entitlements and (2) if, but only if, she signed a release and a new separation package document then she would receive an additional two weeks' pay. These new requirements were not terms in the original employment agreement.

The employee refused to sign the release and sued the employer for wrongful dismissal, alleging that the employer had "repudiated" the agreement. As such (so the argument goes), the employer cannot rely on the termination clause and she should be awarded reasonable notice of termination under the common law.

The court agreed with the employee. It stated that if, considering the surrounding circumstances, a reasonable person would conclude that the party in breach of the contract no longer intended to be bound by the contract, with the result that the innocent party would be deprived of substantially the whole benefit of the contract, the contract is not just breached - it is repudiated. That difference is significant in employment law. In a breach of contract scenario, the default remedy is to award damages to cure the breach, meaning the difference between what happened and what the contract required. But in a repudiation scenario, the original contract is no longer effective so the delta changes to the difference between what happened and what the common law required.

In this case, the court held that by introducing new strings to the employee's contractual termination entitlements, the employer had demonstrated an objective intention to no longer be bound to the contract with the result that the employee lost her entitlement to the extra two weeks' pay. As such, the employer repudiated the agreement and could not rely on the termination clause contained in it. The court therefore awarded the employee common law reasonable notice, which substantially exceeded her entitlements under the employment agreement.

More trouble with just cause termination provisions

The court also commented briefly on the "just cause" provision of the employee's contract. It stated that her employment could be terminated without notice or pay in lieu for just cause, "subject to the ESA", and then defined specific examples of just cause.

The court held that even if the employer had not repudiated the contract, it would have thrown out the termination clauses anyway because this termination with cause section violated the ESA. Why? Because the first half of the clause is arguably inconsistent with the second half. The ESA did not exempt the employer from providing the employee with her ESA notice or severance pay even if she committed one or more of the eleven "categories" of just cause listed in the contract. The court held that the saving provision ("subject to the ESA") could not be used to save a clause which is plainly and unambiguously in violation of the ESA. As such, everything in the contract governing termination (even the without cause sections) are struck as unenforceable.

This "all or nothing" approach to termination provisions is a relatively new phenomenon in employment law, and will not surprise those who have read my previous blog about the Waksdale case. Suffice it to say that employers using "just cause" provisions in their employment contracts should get legal advice from someone who is familiar with the recent case law, or face the risk of an unpleasant wrongful dismissal lawsuit.

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