Important Update: New “Bad Words” for Employment Contracts

As we say, the law is constantly evolving – and it has just evolved again in an important way.

Over the past 20 years, judges across the country have found “Bad Words” and “Good Words” in employment contracts. Seasoned employers and HR practitioners know them well (“benefits,” the “common law,” mentions of previous tenure, requiring “Canadian” experience, etc.). If you don’t have the Good Words or do have the Bad Words, then the contract may not be as strong as you think – we have warned employers about the required changes to their agreements within the last few years to offer proper termination clauses.

In February 2024, one judge in Ontario has added two new sets of “Bad Words” for termination clauses in employment contracts: “in its discretion” and “at any time.”

Yes, you read that correctly: if your employees’ termination clauses contain either of those sets of words, another judge in Ontario may tell you that your termination clause is not worth the paper it’s written on.

This new guidance to employers comes from the Superior Court of Justice’s recent decision in Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029 (“Dufault”). 

In the case, the terminated employee started a claim for wrongful dismissal against the former employer. As is typical, the Court was asked to analyze the termination clause and determine whether it limited the employee to the minimum amount of termination entitlements. 

The Court found multiple defects in the termination clause (which stated, among other things: the employer “may at its sole discretion and without cause, terminate this agreement and the Employee’s employment thereunder at any time upon giving the Employee written notice etc. …” 

The employee successfully argued that the language bolded above misstates the minimum employment standards since it attempts to have ‘sole discretion’ to terminate an employee’s employment at any time – but the minimum standards specifically state that an employer is prohibited from terminating an employee’s employment, in some very specific circumstances. The Court used the following examples of where some terminations “at any time, in its sole discretion” could be a violation of the ESA: when an employee returns from a job-protected leave of absence, when an employee asks about or exercises any minimum standard right (like filing a complaint with the Ministry of Labour). In these situations, the minimum standards legislation in Ontario, the Employment Standards Act, 2000, specifically disallows an employer from terminating an employee. 

Because there was a chance that the termination clause could offend the Employment Standards Act, 2000,  the Court invalidated the termination clause and awarded the Plaintiff complete common law damages for wrongful dismissal. This is a common way for judges in Ontario to invalidate termination clauses – even if there was no evidence that the employer attempted to or did offend the law.

This is a brand new case but has received much attention online and among employment lawyers. While courts have not applied this case in other decisions, employers should be aware of the decision and the impact on the business. Any employee termination from 2022 and 2023 should be reviewed. Any existing future employee contracts should be reviewed and updated where necessary. 

In any event, KMB will continue to monitor case law to see whether the case remains good law in Ontario and Canada. 

Don’t hesitate to contact a member of KMB’s Labour and Employment Law Group if you need help reviewing operations or preparing strategies to mitigate potential risks.