Termination Clause Unenforceable due to 'Potential Violation' of Minimum Standards

In the recent decision of Covenoho v. Pendylum Ltd., the Ontario Court of Appeal awarded a former employee of Pendylum 40 weeks' pay ($56,000.00), overturning the ruling of the Motion Judge at summary judgment. 

Ms. Covenoho was employed by Pendylum pursuant to a one-year fixed term employment agreement, beginning work on July 15, 2013. The employment agreement included a termination provision, which read as follows:

2.1      The term of this Agreement will commence on the date of this Agreement and will continue in full force and effect unless the Agreement is terminated as follows:
(a) immediately by PENDYLUM providing written notice to you if you violate or fail to honor any of these provisions of this Agreement or fail to perform your duties as set out in Appendix A in a satisfactory manner as determined by PENDYLUM (known as Cause); or if the PENDYLUM Client to which you have been contracted terminate[s] its contract with PENDYLUM for your services; OR
(b) by either party providing written notice of at least two (2) weeks to the other.
2.2      In the event of termination, we will have no liability to you, save and except to pay any accrued and earned compensation up to and including the date of termination.
2.3      Upon termination or expiration of the agreement, you agree to return and/or destroy all confidential information and copies and sign an undertaking that all Confidential Information has been returned and/or destroyed.

Just under three months later, on October 11, 2013, Pendylum dismissed Ms. Covenoho and paid her nothing (on the basis that under the Employment Standards Act, 2000 the Company is not required to provide termination pay or pay in lieu of notice for employees with less than 3 months of completed service).

Ms. Covenoho brought a motion for summary judgment to challenge this decision, arguing that the termination clause in her employment agreement was unenforceable because it failed to comply with the minimum requirements of the Employment Standards Act, 2000. Ms. Covenoho further argued that consequently she was entitled to receive payment for the remaining balance of the one-year fixed term (40 weeks pay).

Ms. Covenoho was unsuccessful at summary judgment. The Motion Judge rejected her argument and concluded that Pendylum was entitled to terminate her employment in accordance with the termination provision, and was not required to provide termination pay or common law reasonable notice. 

The Court of Appeal, however, overturned the Motion Judge's ruling and found that:

The termination provisions contained in Articles 2.1(a) and 2.2 of the contract are contrary to ss. 54, 57 and 58 of the ESA in that they purport to allow the respondent to terminate, without cause, the employment of the appellant, in the event that she had been continuously employed for more than three months, by providing less than the statutory minimum notice period. In determining whether the contract is in compliance with the ESA, the terms must be construed as if the appellant had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void. (para 7)

In reaching this conclusion, the court followed its earlier decision in Howard v. Benson Group Inc. and ordered that Pendylum pay out to Ms. Covenoho the remaining 40 weeks owing on the fixed-term employment agreement.

In this regard, the court stated:

In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term and that obligation will not be subject to mitigation”. The termination provisions being void and of no force or effect, the appellant is entitled to receive the salary that she would have earned for the remaining weeks of her fixed-term contract. (para 9)

This is an important decision for employees and employers alike:

  1. If a termination clause potentially violates the minimum standards of the Employment Standards Act, 2000, even if it does not in the instant circumstances, it will be void and unenforceable for all purposes. If, as either an employee or an employer, you have concerns about whether the termination clause in your employment agreement is enforceable, be sure to get it reviewed.
  2. If you are employed pursuant to a fixed-term employment agreement, unless the agreement contains an enforceable termination clause, and you are dismissed prior to the end of the term, you are entitled to receive payment on the balance of the contract. If you believe these circumstances apply to you, have an employment lawyer review your employment agreement carefully before agreeing to any severance arrangement with your former employer.

Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca