Potential violation of ESA enough to void termination provision

In Garreton v Complete Innovations Inc., 2016 ONSC 1178, a decision released earlier this year, the Ontario Divisional Court found that a termination provision in an employment contract was void because it would have violated the Employment Standards Act (“ESA”) if the employee had worked for the employer for more than five years. The Court held that the employer could not rely on the provision, even though in fact the employee had been terminated after less than five years of service. This decision provides important confirmation that potential future violations of the ESA can nullify a notice provision in an employment contract.

Background

The Plaintiff, Marcela Garreton, was terminated for cause by her employer, Complete Innovations Inc (“CI”), after a little over two years of employment. She brought a claim for wrongful dismissal in Small Claims Court, and obtained an award of $25,000, amounting to five months’ notice.

Ms. Garreton had a written employment contract which set out the notice period, in the event that her employment was terminated without cause:

Otherwise Complete Innovations Inc. may at any time terminate this agreement by providing the Employee with (1) one week notice if their duration of continuous employment with the Company is more than 3 months but less than 1 year. (2) weeks prior written notice of intention to terminate if the Employee duration of continuous employment with the Company is more than 1 year but less than (3) years. If the duration of continuous employment with the Company is more than 3 years each additional year will entitle the Employee to (1) one additional week of notice to a maximum of 8 weeks. … Complete Innovations Inc. shall maintain on your behalf your employee benefits for a period of not less than the period required by applicable statute.

The contract did not provide for any severance pay in addition to the above notice provision. It therefore failed to provide a minimum standard prescribed by sections 64 and 65 of the ESA, which entitles employees with five years or more of service to severance if they work for employers with a payroll of over $2.5 million.

The trial judge had declined to determine whether the termination provision in the contract was enforceable, because the employer did not rely on it in support of the termination. The Divisional Court found the failure to address this issue to be an error of law, and therefore considered the question of whether the Plaintiff would be limited to the two weeks’ notice prescribed in the contract. The Court held that a termination provision can be invalid if, at some point during the potential life of the contract, it would fall below the ESA minimum standards:

In my view, the employment contract must be considered at the time it is executed. If the termination provision is not onside with notice provisions and severance provisions (if applicable) of the Act at the outset, then it is void and unenforceable. Potential violation in the future is sufficient. As Low J. states, “It is not that difficult to draft a clause that complies completely with the Act, no matter the circumstance.”

The Court ultimately concluded that the trial judge made no error in finding that there was no just cause to terminate Ms. Garreton, and, therefore, the Court upheld the award of $25,000.

Discussion

This decision has significant implications for many employees with written employment contracts. It provides clarity regarding the issue of whether a termination clause in a contract will be void only if it falls below the employee’s entitlements at the time of termination, or whether a potential future violation is sufficient.

Prior to this case, there were differing lines of authority on this issue at the Superior Court level. In Wright v. The Young and Rubicam Group of Companies (Wunderman), 2011 ONSC 4720, the judge had found that a notice provision in an employment contract was void for potentially violating the ESA. In Ford v Keegan, 2014 ONSC 4989, the judge disagreed with the result in Wright, and found that the contract must “conform to provincial employment standards legislation for the particular employee, in the particular circumstances”.

In this case, the Divisional Court rejected the analysis in Ford, and instead favoured the conclusion in Wright. As a result, employees will now have a stronger chance of nullifying a notice provision in an employment contract, even if the provision would have only hypothetically run afoul of the ESA if they had continued working for the employer for a longer period. This decision thus provides greater protections for employees, who typically have little to no control over the terms of their employment contracts, and places a greater obligation on employers to ensure that a contract meets the ESA minimums from the outset.

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