Why do so many termination clauses in Ontario employment contracts fail when they matter most? These clauses are drafted to limit what an employer owes when employment ends. Yet a large share of them turn out to be unenforceable the moment a court reviews them closely.
This article explains why Ontario courts take such a strict approach, the drafting errors that most often void a clause, and what happens when one fails. It also covers how the risk compounds when a contractor turns out to be an employee.
Key Takeaways
- Termination clauses are meant to limit an employer's liability, but many fail once tested in court.
- Ontario courts read termination provisions as a whole. If any part could breach the Employment Standards Act, 2000, the entire clause may be void.
- A non-compliant "for cause" clause can invalidate an otherwise valid "without cause" clause.
- When a termination clause fails, the employee becomes entitled to common law reasonable notice instead.
- Common law notice is often many times greater than the statutory minimums the clause relied on.
- If a contractor is later found to be an employee, the missing termination clause and the misclassification fail together.
- Older templates are a common source of risk, since many were drafted before courts tightened their approach.
What Termination Clauses in Ontario Employment Contracts Are Meant to Do
A termination clause defines, in advance, what an employer owes an employee if the employment relationship ends. That is its entire purpose.
Without a valid clause, an employee dismissed without cause is generally entitled to reasonable notice under the common law. A well-drafted clause replaces that open-ended entitlement with a defined amount, usually tied to the minimums under Ontario's Employment Standards Act, 2000 (ESA).
The ESA minimums are relatively modest. They include up to eight weeks of notice or termination pay, plus severance pay of up to 26 weeks for eligible employees. A valid termination clause can limit an employer's exposure to those amounts.
The problem is that many clauses fail to do what they were written to do. That failure usually only becomes visible after an employee has already been let go, when the cost can no longer be avoided.
Why Termination Clauses in Ontario Employment Contracts Are Often Unenforceable
Ontario courts take a strict, all-or-nothing approach to termination clauses.
The ESA sets minimum standards that cannot be contracted out of. If any part of a termination provision could give an employee less than the ESA requires, the provision may be unenforceable in its entirety. It does not matter whether the employer actually intended to pay less, or whether the breach would ever have come up in practice.
Courts also resolve any ambiguity in favour of the employee. A clause that can reasonably be read in two ways will usually be read in the way that protects the employee.
How Waksdale Changed the Rules
In Waksdale v. Swegon North America Inc., the Ontario Court of Appeal confirmed that termination provisions must be read together, as a whole, rather than clause by clause.
The employer in that case had a "without cause" clause that met every ESA requirement. Its separate "for cause" clause, however, allowed termination without notice in circumstances broader than the ESA permits. Because the two provisions were read together, the non-compliant "for cause" clause invalidated the compliant "without cause" clause too.
The result surprises many employers. A compliant "without cause" clause does not stand on its own if a different termination provision in the same agreement falls short.
Common Drafting Errors That Void a Clause
A few drafting errors come up again and again in clauses that fail:
- A "for cause" standard broader than the ESA. The ESA only allows termination without notice for wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned. A clause using a lower standard, such as simple "just cause," can void the termination provisions.
- No continuation of benefits. The ESA requires benefits to continue during the statutory notice period. A clause that limits the employee to "salary only" can fail.
- Missing severance pay. A clause that ignores ESA severance pay for eligible employees can give less than the statute requires.
- Broad employer discretion. Some recent Ontario decisions have also scrutinized clauses allowing an employer to terminate "at any time" or "in its sole discretion."
Each of these errors can appear in a clause that otherwise looks carefully drafted.
What Happens When a Termination Clause Fails: Common Law Notice
When a termination clause fails, the consequence is immediate and significant.
The employee becomes entitled to reasonable notice under the common law, replacing whatever the failed clause specified. Courts calculate reasonable notice based on factors such as the employee's age, length of service, position, and the availability of similar employment.
Common law notice is often many times greater than the ESA minimums the clause relied on. A clause intended to cap termination costs at a few weeks of pay can, once struck down, expose an employer to many months of notice instead.
The gap is widest for long-serving and senior employees, whose common law notice periods tend to run considerably longer.
Contractor Misclassification and Termination Exposure
The risk compounds when a business has also treated an employee as an independent contractor.
If a contractor is later found to be an employee, the agreement rarely contains a termination clause built for the ESA. That language was never part of the original arrangement, because the parties assumed the ESA did not apply.
As a result, two things fail at once. The classification turns out to be wrong, and the termination protection the business thought it had never existed. Both issues usually surface in the same dispute.
The CRA's test for contractors in Ontario is a useful starting point, since the same working relationship that creates tax exposure often signals employment status. Our article on contractor vs. employee misclassification in Ontario explains the other consequences of getting the classification wrong.
If you have recently converted a contractor to an employee, that is the right moment to confirm the new employment agreement includes a termination clause built to hold up.
Why Older Employment Templates Are a Common Problem
Many employers rely on templates drafted years ago, or adapted from a different role. That shortcut is rarely safe.
ESA requirements and the way courts read termination provisions both continue to evolve. A clause that met the standard when it was first drafted may no longer meet it today. Templates drafted before Waksdale are a particularly common source of problems.
The same review is worth doing for other restrictive terms in an employment agreement. Most employment non-compete agreements are now prohibited in Ontario, so outdated templates may contain more than one unenforceable clause.
When to Involve a Lawyer
The best time to involve a lawyer is before an employment agreement is signed, while the termination language can still be drafted properly.
It is also worth reviewing existing agreements periodically, and whenever you update your templates, hire a senior employee, or convert a contractor to an employee. Changing an existing employee's termination terms generally requires fresh consideration, so it is worth getting advice on how to do it properly.
The Bottom Line on Termination Clauses in Ontario Employment Contracts
Termination clauses in Ontario employment contracts only limit liability if they are drafted with precision. Courts read them strictly, as a whole, and in the employee's favour.
A single non-compliant provision, anywhere in the termination language, can undo the protection an employer believed it had. When that happens, the employee becomes entitled to common law notice that can far exceed what was budgeted.
If your employment agreements use older templates, or were drafted before Waksdale, our team at Levine Law can help. We can review your termination clauses against current case law and fix the drafting before you need to rely on it.
Frequently Asked Questions
Why are so many termination clauses in Ontario employment contracts unenforceable?
Ontario courts read termination provisions strictly and as a whole. If any part could give an employee less than the Employment Standards Act, 2000 requires, the entire clause may be void, even if the employer never intended to pay less.
Common errors include a "for cause" standard broader than the ESA, cutting off benefits during the notice period, and ignoring severance pay. Any ambiguity is also resolved in the employee's favour.
What happens if my termination clause is found unenforceable?
The employee becomes entitled to reasonable notice under the common law instead of the amount set out in the clause. Courts calculate common law notice based on factors like age, length of service, position, and the availability of similar work.
It is often many times greater than the ESA minimums the clause relied on, especially for long-serving or senior employees. The gap between what was budgeted and what is owed can be substantial.
Can a "for cause" clause invalidate a valid "without cause" clause?
Yes. In Waksdale v. Swegon North America Inc., the Ontario Court of Appeal held that termination provisions must be read together. The employer's "without cause" clause complied with the ESA, but its separate "for cause" clause did not.
Because they were read as a whole, the non-compliant clause voided both. Employers relying on older templates should check every termination-related provision, not just the main one.
How does contractor misclassification affect termination exposure?
If a contractor is later found to be an employee, the agreement usually has no termination clause built for the ESA, since the parties assumed it did not apply.
The employee may then be entitled to common law notice, alongside other consequences of misclassification. Our article on contractor vs. employee misclassification in Ontario explains where else that liability arises and how to reduce it.
Can an existing employee's termination clause be fixed?
Often, yes, but it needs to be done carefully. Changing an existing employee's termination terms generally requires fresh consideration, such as a raise, bonus, or other new benefit, for the amendment to be enforceable.
Simply asking the employee to sign a new agreement may not be enough. The revised clause should also be reviewed against current case law, so that it fixes the original problem without introducing a new one.