CHAUDHRI: Court of Appeal sends warning to Ontario employers

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The Court of Appeal released a decision this month that will impact most Ontario employers, particularly those that use employment agreements.

But first, the facts of the underlying case.

Ellen De Castro was employed by Arista Homes Limited (Arista) for a little under five years. She was 49 at the time of her termination in the position of Decor Store Manager. Her annual salary was $80,000 plus an annual bonus of approximately $5,000.

De Castro was terminated on a without cause basis. She sued for wrongful dismissal damages and her case was heard by way of a summary judgment motion before Justice Markus Koehnen. De Castro sought eight months of wrongful dismissal damages.

The case is interesting because Arista argued in court that De Castro was only entitled to four weeks of pay due to her signing an employment agreement that limited her entitlements on termination. De Castro did not contest that she signed the termination agreement containing the termination clause. Her counsel argued that the termination clause was unenforceable as they purported to provide even less than her statutory entitlements.

For non-law folks, understanding why a termination clause could be unenforceable is not an easy exercise. But suffice it to say, that a hypothetical scenario could render a termination clause invalid (even if it does not occur).

For example, in Arista, even though De Castro was not terminated for cause, the court found that the section of her contract dealing with a hypothetical termination for cause breached De Castro’s rights under employment legislation. The hypothetical breach rendered the entire termination clause void.

This treatment by the courts is non-obvious and even very sophisticated employers may be unaware as to whether or not their own contracts would hold water under this high level of scrutiny.

Getting back to the case, De Castro was awarded eight months of wrongful dismissal damages plus 10% for loss of benefits. She also received a cost award in the amount of $57,620.85.

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Arista appealed the decision and the Ontario Court of Appeal weighed in on De Castro’s employment agreement in a very recent decision.

Upholding the trial decision, the tri-judge panel considered arguments by Arista including that De Castro’s contract “evinces a desire to comply with the law.” To that, the court found “If the language of the agreement violates the law, it is no answer for the employer to say that it did not intend this result.”

It also noted that employees have less bargaining power than employers (when it comes to employment agreements).

Good intentions did not carry the day for this employer. The court of appeal dismissed the appeal and awarded a further $5,000 in costs to De Castro.

The grand takeaway from these two decisions is this: employment contracts can, at the same time, be the best thing you do for your company and the most dangerous.

Contracts are static while employment law is dynamic. A single court decision can render contractual clauses stale, out-dated or worse, illegal.

The news is not all bad. Employers can employ creative ways to keep contracts evergreen and enforceable. The short term costs are often worth it.

Have a workplace problem? Maybe I can help! Email me at sunira@worklylaw.com and your question may be featured in a future column.

The content of this article is general information only and is not legal advice.