Employer’s bad faith conduct may invalidate termination clause in employment contract

By Amanda Montague-Reinholdt

If your employment has been terminated without cause, one of the first questions an employment lawyer will ask you is whether you have a written employment contract. If you do, the employment lawyer will review it to determine if the contract sets out your entitlements when your employment is terminated without cause. Many employment contracts state that employees will only receive the minimum notice and severance entitlements under the Employment Standards Act (ESA). If that clause is properly drafted, it may deprive an employee of their right to a longer notice period under the common law. 

In a judgment rendered last year, the Ontario Superior Court identified a different basis for employees to argue that this type of contract provision cannot be applied to limit their entitlements. The Court held that an employer’s bad faith conduct can amount to a repudiation of the employment contract and invalidate the contract’s termination clause. If this judgment is followed in future cases, a termination clause that, on its face, complies with the law could still be invalidated, based on the employer’s conduct.

In Humphrey v Mene, the plaintiff had helped to create a new start-up company and was subsequently appointed as its Chief Operating Officer. She later signed an employment agreement that contained a termination clause limiting her rights to the minimum entitlements under the ESA. As a relatively short service employee, she was only entitled to two weeks’ notice under the ESA. However, the Court ruled that Mene could not rely on the termination clause in Ms. Humphrey’s employment contract.

First, the Court held that the employment agreement was void because Mene gave Ms. Humphrey no additional consideration for signing it. She was, under the law, already an employee before signing the contract, and received no additional compensation or benefit under the agreement. Therefore, the terms in that agreement were not valid or enforceable.

The Court went on to hold that, even if the employment agreement was valid, the termination clause still did not apply. The Court noted, in passing, that the termination clause did not expressly apply to the circumstances in which Ms. Humphrey was terminated (a constructive dismissal based on a toxic workplace). However, the main basis for the Court’s conclusion was that the employer’s overall conduct amounted to a repudiation of the employment agreement and therefore the employer could not rely on the provision limiting Ms. Humphrey’s entitlement when terminated without cause.

To justify this conclusion, the Court’s judgment recounts numerous examples of the employer’s reprehensible conduct, including:

• After Ms. Humphrey requested a review of her salary, her employer immediately suspended her from her position, and informed her she would either be terminated or demoted.
• The employer sent a company-wide message to employees strongly implying Ms. Humphrey had engaged in some form of wrongdoing.
• The employer knowingly made a false claim of just cause to terminate Ms. Humphrey’s employment, and only withdrew the claim for just cause late in the litigation process.
• Ms. Humphrey’s boss created a toxic working environment by continually swearing at, humiliating, and belittling her.

Ms. Humphrey was awarded significant damages as a result of the employer’s breach of her contract, including a notice period of 11 months, as well as aggravated and punitive damages.

This judgment has potential significance for many employees who are badly mistreated by their employers. The standard to be met to invalidate an employment contract is clearly very high; however, in cases where the employer engages in serious bad faith conduct, employees can avoid the application of a contract provision that harshly limits their entitlements on termination without cause. It remains to be seen whether other judges endorse this approach in future cases.

If you have experienced bad faith conduct, harassment, or mistreatment by your employer, and wish to review your employment contract and the circumstances of your employment, contact one of our experienced employment lawyers here.

[This article is for informational purposes only and does not constitute legal advice, which cannot be given without consideration of your individual circumstances.]