Damages can be expensive for unenforceable termination clauses in fixed-term employment contracts

By Barbara Green

Law360 Canada (June 1, 2023, 11:44 AM EDT) --
Barbara Green
Barbara Green
In Tarras v. Municipal Infrastructure Group Ltd. [2022] O.J. No. 4007, the Ontario Superior Court of Justice held that an unenforceable termination provision entitled the terminated employee to payment of the balance of a fixed three-year term employment contract.

Equally important, the termination clause in the employment agreement contained subsections addressing terminations “for cause” and “without cause.” The court held that the “for cause” subsection of the employment agreement violated the Employment Standards Act (ESA), rendering all clauses in the employment contract void and unenforceable.

In its decision, the court cited the landmark Waksdale v. Swegon North America Inc. [2020] O.J. No. 2703 decision from the Ontario Court of Appeal.

In short, the invalid “for cause” provision rendered the entire termination clause unenforceable.

The employee was awarded $479,166.67 in damages. He was also awarded outstanding vacation pay and incentive compensation as well as benefits that represented almost two years of the entitlements of his three-year employment agreement.

The Tarras decision is a timely reminder for employers about the risks of entering into a fixed-term employment agreement with an executive, or other senior level employee, where it may not be necessary. Damages for the termination of a fixed-term employee can get expensive.

Poor wording of the employment agreement

The plaintiff, Mark Andrew Tarras, was a professsional engineer and one of the former owners of The Municipal Infrastructure Group Limited (TMIG). In December 2019, Tarras and the other former owners of TMIG sold their interests in the company via a share sale to T.Y. Lin International Canada Inc.

During the sale, Tarras negotiated an employment agreement with the new owner of the company and accepted the role of vice-president for a gross base salary of $250,000 per year, plus performance bonus, benefits and vacation pay.

Notably, the employment contract was drafted with the participation of the plaintiff Tarras and his legal counsel and included “for cause” and “without cause” provisions for early termination of the agreement.

The employment contract was for a fixed three-year term ending on Dec. 2, 2022. But on Nov. 25, 2020 — just 13 months into the term — the company terminated Tarras “without cause” effective Dec. 31, 2020.

Further, the court noted, in addition to permitting TMIG to dismiss Tarras without cause, the contract also provided for termination — without notice or severance pay — in the event of cause.

Ontario Regulation 288/01 stipulates that an employer cannot terminate employment without notice or severance pay unless the employee is “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned.”

Meanwhile, the “for cause” language in Tarras’ employment agreement was defined as:

  • the repeated and demonstrated failure on [the employee’s] part to perform the material duties of his/her position in a competent manner, which [the employee] fails to substantially remedy within a reasonable period of time after receiving written warnings and counseling from TMIG;
  • engaging in theft, dishonesty or falsification of records;
  • the wilful refusal to take reasonable directions after which [the employee] fails to substantially remedy after receiving written warnings from TMIG; or
  • any act(s) or omission(s) that would amount to cause at common law.

Tarras sued TMIG for breach of contract and wrongful dismissal.

On a motion for summary judgment, the court granted judgment in favour of Tarras, and awarded damages of $479,166.67 on the balance of the 23 months left of the three-year term of the employment contract.

Court’s decision on Tarras, reasoning

The dispute concerned the enforceability of the termination clause contained in the employment agreement which purported to limit the plaintiff’s rights to his statutory entitlements.

In addition to permitting TMIG to dismiss the plaintiff without cause, the agreement also provided for termination without notice or severance pay “for cause,” defined in a manner that went beyond the scope of the limited exceptions under the Employment Standards Act.

The court found the “for cause” language in the employment contract contravened the ESA.

Relying on the Ontario Court of Appeal’s decision in Waksdale, the court held that the unenforceable “for cause” provision subsequently rendered the entire termination clause under the agreement void and unenforceable.

The court decided that the sophistication of the parties and the fact that legal counsel by Tarras was retained during the course of negotiations were “subjective considerations,” which should not be given any weight when assessing statutory compliance of the ESA.

The court also found it irrelevant that the parties did not rely on the unenforceable provisions. Rather, the plain wording of the termination clause in an employment agreement, and whether the wording contravenes the minimum standards under the ESA, is the approach that courts will adopt in assessing whether a termination clause is enforceable.

The court held that, in the absence of an enforceable early termination clause, a fixed-term employment agreement obligates an employer to pay an employee to the end of the term. This obligation is not subject to any duty on the employee’s part to mitigate.

As a result, the plaintiff was awarded his remaining 23 months of salary and other entitlements under his employment agreement.

Five lessons for employers in drafting employment contracts

Ontario courts have continued to adopt the strict and technical approach in the Waksdale decision when assessing the enforceability of termination clauses. This means:

1. Employers must adhere to the ESA’s minimum standards in drafting termination provisions in employment contracts.

2. An employee — even a sophisticated and seasoned executive with the assistance of legal counsel — cannot waive his/her rights to minimum employment standards set out in the ESA in an employment contract. In other words, employers cannot “contract out” of the ESA.

3. The wording in each provision of an employment contract should be carefully reviewed. One wrong word, or one misplaced word, can void a termination clause.

4. The Tarras case serves as a warning to employers about the dangers of fixed-term employment contracts in the event of an unenforceable termination provision. With a fixed-term contract, employers may be taking on additional liability. Employers may be better off entering into an indefinite term employment agreement.

5. Unlike an indefinite term contract, employees do not have an obligation to mitigate their damages under a fixed-term contract after a without cause termination.

Barbara Green is a commercial litigator and partner at Robins Appleby LLP, specializing in compensation packages for C-level executives. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, Law360 Canada, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Photo credit / Yossakorn Kaewwannarat ISTOCKPHOTO.COM

Interested in writing for us? To learn more about how you can add your voice to
 Law360 Canadacontact Analysis Editor Peter Carter at peter.carter@lexisnexis.ca or call 647-776-6740.

LexisNexis® Research Solutions