In De Castro v. Arista Homes Limited, 2024 ONSC 1035, Ontario’s Superior Court of Justice (Court) held the termination provision in an employment contract was unenforceable because it defined “cause” more broadly than does the Employment Standards Act, 2000 (ESA), which articulates limited circumstances in which an employee can be dismissed without notice or pay in lieu of notice. The Court found also that the employer did not meet its burden to prove the employee failed to mitigate her damages because it did not offer any help with her job search (e.g., reference letter, leads, job counselling) or provide any evidence of comparable positions to which she should have applied.  

Background

The employee was employed in a managerial position as décor store manager for five years when her employment was terminated without cause in October 2020, at the height of the Covid pandemic. At that time, the employee’s annual salary was $80,000 plus benefits and she received an annual bonus of $5,000. She was 49 years old.

The termination provision in the contract provided:

If you are terminated for Cause or you have been guilty of wilful misconduct, disobedience, breach of Employment Agreement or wilful neglect of duty that is not trivial and has not been condoned by ARISTA, then ARISTA will be under no further obligation to provide you with pay in lieu of reasonable notice or severance pay whether under statute or common law. For the purposes of this Agreement “Cause” shall include your involvement in any act or omission which would in law permit ARISTA to, without notice or payment in lieu of notice, terminate your employment. (Emphasis added)

The employee did not begin to apply for new employment until November 2021 (more than a year after the termination of her employment) because her daughter was diagnosed with cancer around the time her employment was terminated and passed away in October 2021. She found new employment in September 2022.

The employee commenced a claim for wrongful dismissal and brought a motion for summary judgement.

Employee’s Argument

The employee argued she was entitled to common law reasonable notice because the termination provisions in her contract were unenforceable. Since the decision of the Court of Appeal for Ontario (Court of Appeal) in Waksdale v. Swegon North America Inc. (discussed in detail here), if an employment contract contains a termination provision that is contrary to the minimum standards of the ESA, all termination provisions in the contract are unenforceable, and the employee is entitled to common-law notice, even if the offending termination provision is not at issue. The employee acknowledged the offending provision dealt with termination for cause and she was not terminated for cause. However, she argued that if the “termination for cause” provision was contrary to the ESA’s minimum standards, the “termination without cause” provision would also be unenforceable.

Employer’s Argument

The employer argued the termination provision was enforceable and limited her to the ESA’s minimum requirements (i.e., statutory notice of termination and severance pay). In addition, the employee failed to mitigate her damages by securing comparable employment. Finally, it would be unfair if the court were to decide the case by summary judgment. The analysis in this Insight focuses on the termination provision and mitigation issues only.

Court’s Decision

Termination provisions

The Court relied on Waksdale when it held that the termination for cause provision in the contract breached the ESA by defining “cause” more broadly than the limited circumstances under ESA in which an employee can be dismissed without notice or pay in lieu of notice. As a result, all termination provisions in the contract were unenforceable.

The parties agreed s. 2(1)3 of Ontario Regulation 288/01 (Regulation) established the circumstances in which an employee can be terminated without notice or termination pay under Part XV of the ESA: “An employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” The Court noted that s.2(1)3 of the Regulation narrowed the circumstances once available for just cause at common law.

The Court’s interpretation was that the termination provision defined “cause”:

…by indicating that “Cause shall include” conduct that allows the defendant to terminate without notice. In other words, it purports to include more than just the provisions of Regulation 288/01. On my reading of the clauses and the case law, that breaches the ESA and requires all termination provisions in the employment contract to be struck out.

The Court did not agree with the employer that the contract required the breach of the contract to be “wilful” for it to be grounds for termination without notice. The Court also stressed that if this was incorrect, “then at a minimum the provision is ambiguous and should be construed against the employer who drafted the contract.”

Finally, the Court emphasized that even if only a “wilful” breach of the employment agreement would lead to a termination without notice, the agreement contained terms that, even if wilfully breached, would not provide grounds for termination without notice under the ESA or at common law. It offered the following examples: if an employee wilfully started work only after the start time set out in the agreement, or engaged in only one minor deliberate breach of a policy or guideline contrary to the requirement in the agreement that employees observe all policies and guidelines. 

Anticipating that the employer might argue “that the breach of the employment agreement has to be “‘not trivial’ under the termination clause,” the Court emphasized the qualifier “not trivial” applied exclusively to wilful neglect of duty. It does not apply to wilful misconduct or disobedience.

Mitigation

The Court held the employer did not meet its burden to prove the employee failed to mitigate her damages. To meet that burden, the employer must prove (a) the employee failed to take steps to mitigate her damages and (b) if she had done so, she would have been expected to secure comparable employment suited to her abilities.

The Court stressed the employee was terminated at the height of the Covid pandemic when vaccines were not yet available and in-person contact was discouraged. In addition, the employer did not offer the employee any help with her job search (e.g., counselling, leads, a reference letter). The only evidence the employer provided the Court were the LinkedIn profiles of people who secured comparable employment during the time the employee was not employed. The employer did not provide any evidence of comparable positions to which the employee should have applied when she lost her employment. Finally, the Court found the delay in the employee’s efforts to seek employment (i.e., she did not apply for any jobs during the eight-month notice period that she claimed) was reasonable because it was caused by her daughter’s cancer diagnosis and death. The Court emphasized that courts are tolerant in assessing mitigation and expect reasonableness rather than perfection from an innocent employee. Finally, the Court noted that following the death of the employee’s daughter, she began seeking employment and found a new job in September 2022.  

Notice Period

The Court held the appropriate notice period was eight months and awarded an additional 10% in lieu of lost benefits. The Court considered the factors from Bardal v. Globe & Mail Ltd., 1960 CanLII 294 (ON SC), including the character of employment, the length of service, and the age of the employee, and noted that courts have recognized that the pandemic made it more difficult for employees to find positions. The employer failed to provide any evidence about maintaining the cost of the group benefits coverage and, in such cases, courts have awarded payments of 10% in lieu of benefits.

Bottom Line for Employers

Arista Homes reminds employers the Court of Appeal’s decision in Waksdale is important when determining if termination provisions are enforceable. Further, employers should exercise caution in defining the circumstances in which an employee has no entitlement to notice of termination to ensure they are complying with the ESA. Employers are encouraged to seek the advice of experienced employment counsel when drafting employment contracts and, most importantly, termination provisions.  

Arista Homes also provides guidance for employers seeking to prove that an employee who has been dismissed has failed to mitigate their damages.

• Employers must actively engage in the mitigation process by attempting to help the employee with their job search by, for example, providing reemployment counselling, job leads, and a reference letter.
• Employers must also provide the court with evidence of available comparable positions the employee should have applied for during the reasonable notice period claimed.

Finally, the Court’s reference to the impact of the pandemic on the assessment of reasonable notice confirms that courts may consider external economic factors when engaging in this exercise.