A termination clause may be void where it could theoretically breach the Employment Standards Act in the future – even if it is possible that no breach would have ever actually occurred – according to the Ontario Superior Court of Justice. In Rutledge v. Canaan Construction Inc., 2020 ONSC 4246, the Court held that the plaintiff’s termination clause was void because it could breach the Employment Standards Act if certain circumstances had changed in the future.
The plaintiff, Mr. Rutledge, was employed as a construction worker. Under Ontario’s Employment Standards Act and Regulations, construction employees are not statutorily entitled to notice of termination or termination pay. However, the Court noted that construction employees may be entitled to “severance pay” in certain situations under the Act.* In particular, the Court stated that severance pay may be required if the construction employee has 5 years of service and the employer either has a payroll of at least $2.5 million or dismisses at least 50 staff in certain situations.
The defendant Canaan’s payroll apparently did not exceed $2.5 million and it did not even employ 50 staff. Therefore, under the present conditions, the plaintiff could not be entitled to notice of termination, termination pay, or severance pay under the Act, either presently or in the future.
The plaintiff’s employment contract contained a termination clause, which he argued was void, similarly stating that he would not be entitled to any notice of termination, termination pay, or severance pay upon dismissal. The defendant argued that this termination clause was valid as it did not breach any of the minimum requirements of the Act relating to the employee and employer.
The Court noted that the plaintiff’s termination clause did not presently breach any term of the Act. However, the Court held that it was hypothetically possible that circumstances would change in the future so that the termination clause would be void under the Act. In particular, the Court considered that it was possible that:
- The plaintiff’s duties could change in the future, such that he would no longer be a construction employee and would therefore be entitled to notice of termination and/or termination pay; or
- The defendant could grow in size to more than 50 staff and then dismiss at least 50 staff at once, or could grow to a payroll of more than $2.5 million, in which case the plaintiff would be eligible for severance pay after 5 years of employment.
In deciding that the termination clause was void, the Court relied on the Ontario Court of Appeal’s decision in Covenoho v. Pendylum Ltd., 2017 ONCA 284, which held that “if a provision’s application potentially violates the ESA at any date after hiring, it is void.” The BC Court of Appeal reached a similar conclusion in Shore v. Ladner Downs, 1998 CanLII 5755 (BC CA).
However, in both Covenoho and Shore, the plaintiffs’ termination clauses would have breached the respective Employment Standards Acts simply if the employments had continued for a longer period. In Rutledge, on the other hand, the plaintiff’s termination clause would not have breached the Act in the future unless some hypothetical changes occurred. In order to find the termination clause unenforceable, the Court held that even remote potential violations of the Act will render a termination clause unenforceable:
Accordingly, and being mindful of the policy considerations outlined in Machtinger at pp. 1002-1005, even a potential violation of the ESA, no matter how remote, should be unenforceable.
Although BC’s Employment Standards Act does not include similar severance provisions to those found in Ontario’s Act, the decision in Rutledge may call into question termination clauses that could theoretically breach BC’s Act in ways that are not anticipated by an employer. For employees, this decision may justify additional scrutiny of termination clauses to determine whether they are, or could ever be, in breach of the Employment Standards Act. For employers, additional caution is advisable to ensure that termination clauses are carefully drafted in a way that anticipates future changes to the status of the parties.
*Note: In this decision, the Court states that construction employees are entitled to severance pay under the Ontario Employment Standards Act, stating 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.” However, Regulation 288-01 appears to explicitly exclude construction employees from being entitled to severance pay:
9.(1) The following employees are prescribed for the purposes of subsection 64(3) of the Act as employees who are not entitled to severance pay under section 64 of the Act…A construction employee.