The recent Court of Appeal decision in De Castro v. Arista Homes Limited follows the current trend of courts frequently striking down termination clauses in employment contracts. In that decision, the Court of Appeal sided with the employee and upheld an award of damages that was far greater than the compensation set by the employment contract. This should serve as another reminder to employers of the significant liabilities they may face in a wrongful dismissal lawsuit and the need to have carefully drafted and up-to-date employment contracts.
Case Background
Ellen De Castro was employed by the defendant Arista Homes Limited for four years and nine months. She was 49 years old at the time she was dismissed without cause, held the position of store manager, and earned an annual salary of $80,000 plus a $5,000 annual bonus.
Upon dismissal, Arista provided Ms. De Castro with a total of 4 weeks payment in lieu of notice, representing her minimum statutory entitlements pursuant to the Employment Standards Act, 2000 (the “ESA”). This was also the amount that Ms. De Castro was limited to pursuant to the termination clause contained in the employment contract that she entered into at the beginning of her employment. Nonetheless, Ms. De Castro brought a wrongful dismissal lawsuit against Arista, arguing that the termination clause was in breach of the ESA and thus unenforceable, and claiming damages in lieu of reasonable notice of termination pursuant to common law.
Ms. De Castro then brought a motion for summary judgment. While Arista’s lawyer argued that proceeding with a summary judgment motion was unfair, the court disagreed and found that the case was appropriate to be decided by summary judgment, rather than requiring a full trial.
The court determined that the termination clause breached the ESA, as the provision defined “cause” more broadly than the ESA does. The court awarded Ms. De Castro:
- an 8 month notice period pursuant to common law, along with
- her partial bonus and benefits for that period.
Ultimately, Ms. De Castro was awarded:
- damages of over $57,000.00,
- costs and interest, and
- the 4 weeks that was paid to her upon dismissal.
The Appeal
Arista appealed the decision to the Court of Appeal, and the lawyer argued that the lower court erred in finding that the termination clause was unenforceable. Had the termination clause been enforceable, Ms. De Castro would have already been paid all of her entitlements under the employment contract, and she would not have any further claim for damages.
The Court of Appeal considered the termination clause in detail, which contained the following language:
“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.”
The Court of Appeal compared this language to the wording of O. Reg. 288/01, a regulation under the ESA, which provides that the following employees are not entitled to statutory notice or termination pay:
“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.”
Although the language in the termination clause is close to the wording of the regulation, there are important differences. For example, the termination clause includes instances where the employee could be dismissed without notice “for cause”, or for “breach of Employment Agreement”, neither of which are included in the regulation. Accordingly, the Court of Appeal found that the termination clause contemplates termination for acts and omissions that would not justify termination under the ESA, which renders the entire termination clause to be unenforceable.
The Court of Appeal found that there was no error in the lower court’s decision, and therefore dismissed Arista’s appeal, along with an award of $5,000 in additional costs.
Not all Termination Clauses are Unenforceable
In light of the De Castro decision, it may seem as though the court will always find termination clauses to be unenforceable. However, in the recent decision of Bertsch v. Datastealth Inc., the Court of Appeal found a termination clause to be enforceable. As a result, the employee was not entitled to common law notice or anything more than the employer had paid them, and their lawsuit was dismissed.
The takeaway is that the employer’s liability will be significantly different depending on whether there is an unenforceable termination clause like in the De Castro case, or an enforceable one like in the Bertsch case. The wording of the clause makes a very big difference.
We will have more on the Bertsch decision soon, so stay tuned for our upcoming blog post on that topic.
Conclusion
The De Castro decision is another example of the difference that a well-drafted employment contract can make. Had the termination clause been enforceable, the employer would not have been liable for anything further than the 4-week payment it had already provided. However, because of mistakes contained in the wording of the termination clause (which may seem fairly minor and not easily noticed by the untrained eye), the employer was liable for a significant damages award, in addition to the legal costs it had to pay to its own lawyer.
If you are an employer, we can help you prepare employment contracts with enforceable termination clauses that will significantly reduce your potential liability.
If you are an employee who has been dismissed, we can assess the strength of your position and whether it makes sense for you to fight for a greater severance package than what was offered to you by your employer.
If you want advice on your legal situation, please feel free to contact us.
