Termination Provisions: A Novel Twist, The Lawyer’s Daily (July 17, 2020)

(this article originally appeared in the Lawyer’s Daily on July 17, 2020)

By Nikolay Y. Chsherbinin

A termination clause is only enforceable if it conforms to the provisions of the Employment Standards Act, 2000 (“ESA”). If the clause’s application “potentially” violates the ESA in the future, it is void. The issue of enforceability of termination clauses does not cease to vacillate. An employment case in point is Rutledge v Canaan Construction Inc., 2020 ONSC 4246, where the Divisional Court decided that “even a potential violation of the ESA, no matter how remote, should be unenforceable.” An elimination of a need for proximity represents a crescendo of expansion of this legal principle. As will be argued, I am of the view that Rutledge was wrongly decided and should be appealed.

In Rutledge, an appeal from the Small Claims Court’s trial decision, in 2012, Canaan Construction Inc. (Canaan) hired Chris Rutledge as a construction employee. During the course of his employment, Rutledge had been laid off from time to time. His last continuous period of employment started in November 2015. On that occasion, he signed an employment contract that contained the termination clause, which confirmed that, due to the nature of his job, Rutledge was not entitled to the statutory notice or benefits upon dismissal. On October 10, 2017, Rutledge was placed on a temporary layoff, but was not recalled. Nor did he receive any termination pay. In December 2017, Rutledge found alternate employment. Six months later, he launched a wrongful dismissal action against Canaan. In his statement of claim, Rutledge made no mention about the existence of the employment contract. In its statement of defence, Canaan pleaded that the employment contract absolved it from any requirement to provide notice or termination pay. In the alternative, Canaan argued that because Rutledge was a construction employee, pursuant to the ESA, it had no obligation to provide either.

The trial judge sided with Rutledge and awarded him damages equivalent to 9.5 weeks’ salary. Canaan appealed.

I pause to note that section 3(5) of the ESA states that: “[t]his Act does not apply with respect to the following individuals….” In subparagraph 3(5)(12) the ESA continues: “[a]ny prescribed individuals.” The verb “prescribe” signals that there is a Regulation that defines a class of employees to whom the ESA does not apply. Indeed, in subparagraph 2(1)(9), the Ontario Regulation 288/01 prescribes that “a construction employee” is not entitled to notice of termination or termination pay under the ESA. The term “construction employee” is defined in Regulation 285/01 and includes “an employee employed at the site in any of the activities described in the definition of construction industry.”

In dismissing Canaan’s appeal, the court accepted that for the entirety of his employment Rutledge was a construction employee. It then concluded that: “[a]s a ‘prescribed’ employee, construction employees may not be entitled to the employment standards governing the termination of employment or notice thereof, but are still entitled to the employment standards guaranteed in the event of their severance, as outlined in ss. 63-66.”

This is a fatal misstatement of the Regulation 288/01, which in subparagraph 9(1)(7) prescribes that construction employees are not entitled to severance pay.

To bolster its conclusion, the court continued: “[i]f Canaan grew in size, employing more than 50 employees and then discontinued its business, or else had a payroll more than $2.5 million, Rutledge would be entitled to severance pay, irrespective of his job description.” The underlined proposition is not sound, because an employee’s position is precisely what either entitles or disentitles him or her to the ESA’s protection. This is also why there are “prescribed” classes of employees who are exempted from the ESA’s protection.

The court also found that even if a particular employment standard under the ESA does not yet apply to an employee, it would be sufficient to void a termination clause if a provision of an employment contract potentially violates the ESA. It reasoned: “[a]accordingly, on the chance that Rutledge’s position at Canaan changed to something other than a construction employee, the effect of the Employment Contract is that it denies Rutledge his right to benefits during his notice period, which is protected by the ESA.”

One could argue that courts are supposed to focus on material facts, not prognosticate future events. In Rutledge, the court found: “[i]n the case before me, it is not disputed that Rutledge was a construction employee for the entirety of his employment.” Why was it then necessary for the court to hypothesize that Rutledge’s position could have changed to something other than a construction employee? Rutledge’s job never changed. This undisputed fact should have ended the court’s quest.

The court’s focus on a hypothetical event artificially magnified its significance and corresponding impact on the enforceability of the termination clause. Whatever was the rationale, the effect of the court’s pronouncement that “even a potential violation of the ESA, no matter how remote…” voids the termination clause, obfuscated the purpose behind the relevant legal principle and contributed to the mystification of both employment lawyers and their clients.

Remoteness and its proximity are the salient determinants vis-à-vis the enforceability of the termination clause. A glance into relevant jurisprudence provides an immediate illustration. In Garreton v Complete Innovations Inc., 2016 ONSC 1178, a “potential” breach of the ESA was linked to the employee’s entitlement to severance pay to which he had a statutory right, but was not yet entitled at the time of dismissal. In Slepenkova v Ivanov, 2007 CarswellOnt 5643, a “potential” violation of the ESA had to do with the employment contract limiting the employee’s entitlement to only two weeks’ notice of dismissal. Unlike in Rutledge, in these cases the potential disentitlement to severance pay and augmented notice period was not a mere remote, but a real possibility of a breach of the ESA.

Rutledge is not only wrongly decided, it veers the law of enforceability of termination clauses off in a new direction; a detour that should be resisted and corrected.

In summary, the life of termination clauses has not been logic: it has been experience.