We have previously written about problems employers may face when relying on certain types of termination provisions in employment agreements. Specifically, Ontario courts will not enforce a provision that attempts to remove an employee’s entitlement to common law notice upon termination if there is a defect in the agreement’s termination provisions that means that they do not comply with the Employment Standards Act.

This blog post will review this issue and look at a recent decision of the Court of Appeal for Ontario, which identifies another issue that employers and employees need to be aware of when considering the enforceability of contractual termination provisions. The case demonstrates that courts may refuse to honour the termination provisions of written employment agreements, even if they comply with the legislative requirements, in circumstances where the employee’s duties and responsibilities have significantly changed since the agreement was entered into.

Employment agreements may try to limit an employee’s notice entitlements upon termination

Most employees are entitled to notice, or compensation in lieu, if their employer terminates their employment. We previously wrote about reasonable notice, which may be a minimum period of notice under the Employment Standards Act, a longer period of notice granted by a court (common law notice), or a specific period set out in an employment agreement.

Some employment agreements, however, seek to limit an employee’s compensation upon termination to the minimum notice period as laid out by the Employment Standards Act, preventing the employee from claiming common law notice.

Ontario courts will not allow employers to rely on contractual termination provisions that do not comply with legislated employment standards

An important line of Ontario court decisions indicates that overly broad for cause termination provisions may violate the Employment Standards Act and render all of the agreement’s termination provisions invalid.

Under the Employment Standards Act and Ontario’s Termination and Severance of Employment Regulation, a terminated employee is entitled to the statutory minimum notice period in most circumstances, but not where they are guilty of wilful misconduct, disobedience or wilful neglect of duty that has not been condoned by the employer.

Given that wilful misconduct constitutes a more serious subset of the misconduct that may justify a termination for cause, courts have found that contractual termination provisions that strip away an employee’s entitlement to statutory notice in the event of a just cause termination violate the Employment Standards Act.

Furthermore, courts have decided that an agreement’s termination provisions need to be read as a whole. Therefore, if the just cause provision is invalid, so are all others, including those that remove an entitlement to common law notice for employees terminated without cause. You can read more about some of these decisions here and here.

Employers and employees may also need to consider the changed substratum doctrine

The recent case of Celestini v Shoplogix Inc., identifies another situation in which the courts may refuse to recognize and enforce the termination provisions of an employment agreement.

In this case, an employee who was terminated without cause argued that he was entitled to common law notice. He pursued this argument even though he had a written employment agreement that removed this entitlement to common law notice. The agreement also specified that the employer could terminate him without cause by giving him one month’s written notice and paying his base salary and health coverage for another 12 months.

The employee relied on the changed substratum doctrine.

The changed substratum doctrine may apply if the employee’s responsibilities and status have significantly changed

The Court of Appeal explained that:

“The changed substratum doctrine operates as a limit on when an employee’s common law entitlements will be restricted by the express terms of a historical written contract. Given that an employer-employee relationship may evolve in a fundamental way after the written contract was made, the doctrine recognizes the potential inappropriateness and unfairness of applying the contract’s termination provisions to circumstances that were not contemplated at the time of contracting.”

The Court said that termination provisions in historical written contracts may not be enforceable if the “substratum of the employment contract has disappeared or substantially eroded” because the employee’s responsibility and status have significantly changed over the period of employment.

Importantly, however, this will not be the case if the agreement specifically states that its provisions, including those on termination, apply even if the employee’s position, responsibility or salary changes, or the parties ratified the continued application of the agreement when the change in duties occurred.

Employee successfully argued that the substratum had been substantially eroded, rendering the agreement termination provisions unenforceable

The employment agreement was signed in 2005 and provided that he would be employed as the chief technology officer. In 2008, the parties to the employment agreement entered into an incentive compensation agreement, which set out the terms of a new bonus plan which increased the employee’s compensation, and the employee’s workload and responsibilities increased to include new areas like sales and financing. The employer did not obtain an acknowledgement that the 2005 agreement remained applicable.

Based on the evidence, the Court decided that the employee’s duties had changed substantially. It found that, even though his job title remained the same, the changes were not incremental or expected when he started in 2005.

As a result, the Court held that the termination provisions of the 2005 agreement were not enforceable. The Court decided that the employee was entitled to common law damages based on an 18-month notice period.

Contact Grosman Gale Fletcher Hopkins LLP in Toronto for Advice on Employee Termination and Employment Agreements

The knowledgeable and experienced employment lawyers at Grosman Gale Fletcher Hopkins LLP remain on top of developments in employment law, including those relating to the enforceability of agreement provisions that attempt to constrain termination entitlements. We represent both employers and employees in termination-related disputes, helping organizations manage litigation risks and employees advocate for their entitlements. For assistance, please contact the team at Grosman Gale Fletcher Hopkins LLP online or call 416.364.9599 to schedule a consultation.