In Kopyl v. Losani Homes, 2024 ONCA 199, the Court of Appeal for Ontario (OCA) affirmed the lower court’s finding that an invalid without-cause termination clause in an employee’s employment agreement does not invalidate a fixed-term clause, and that a fixed-term clause is not a termination clause.  The OCA held further that upon the termination of an employee’s employment prior to a fixed term’s expiry, the employee will be entitled to receive the compensation they would have earned to the end of the fixed term, and they will have no duty to mitigate.

Background

The employer hired the employee on a one-year fixed-term contract from July 6, 2022, to July 6, 2023 (Term).  The employment agreement included for-cause and without-cause termination clauses (Termination Clauses).

On January 9, 2023, the employer terminated the employee’s employment on a without-cause basis and paid her four weeks’ salary.

Employee’s Position

The employee argued that the Termination Clauses were void because they contravened requirements set out in the Employment Standards Act, 2000 (ESA).  As the employer had no right to terminate her employment prior to the fixed term’s expiry, the employee was entitled to be paid her salary for the unexpired portion of the fixed term, and she had no duty to mitigate her damages.

Employer’s Position

The employer agreed with the employee that because the Termination Clauses contravened the ESA they were void. However, relying on Waksdale v. Swegon North America Inc., 2020 ONCA 391 (discussed here), the employer argued that where one termination clause in an employment contract contravenes the ESA, all termination clauses in the contract are automatically voided. The fixed-term clause was in effect a termination clause and because the Termination Clauses were void, the employer argued, the fixed-term clause was also void.  Accordingly, since the employee’s employment was not subject to a fixed term, the employee was not entitled to compensation for the unexpired portion of the Term.  She was entitled to “reasonable notice” at common law, subject to a duty to mitigate her damages. According to the employer, the four-week salary paid to the employee more than satisfied the employer’s obligations upon the employee’s termination. 

Decision of the Lower Court

The lower court found in favour of the employee.  Relying on Howard v. Benson Group Inc., 2016 ONCA 256, it found that a term in a contract that provides for a fixed term of employment is not a termination clause because when a fixed term expires, the employment relationship terminates automatically and the employer is not obligated to provide notice or payment in lieu of notice.  Accordingly, even though the Termination Clauses were invalid, the fixed-term clause remained in effect. The employee’s employment was wrongfully terminated and she was therefore entitled to a payment equal to her salary and benefits for the unexpired portion of the Term, less any amounts paid by the employer.  Furthermore, the employee had no duty to mitigate.

The employer appealed to the OCA. 

OCA’s Decision

For the following reasons, the OCA dismissed the employer’s appeal:

• Benson Group Inc., which stands for the proposition that an invalid without-cause termination clause does not invalidate a fixed-term clause, is dispositive. 

• Without an enforceable without-cause termination clause, the employee was entitled to receive the compensation she would have earned to the end of the term, without any duty to mitigate.

• Waksdale does not apply to this case.  It did not involve a fixed-term employment agreement. In Waksdale the OCA merely held that an invalid termination clause in an employment contract voided other termination clauses in the agreement, such that the employee was entitled to reasonable notice upon termination of their employment. Furthermore, Waksdale did not refer to Benson Group Inc., or suggest that when a termination clause in an employment contract is invalid it converts a fixed-term contract into a contract that may be terminated on reasonable notice.

Bottom Line for Employers

The OCA’s decision in Losani Homes reminds employers that a court may not invalidate an entire employment contract, or a fixed-term clause in such an agreement, when the agreement contains a termination provision that is unenforceable because it violates the ESA. Even when an employment contract contains an invalid termination clause, a court may find that a fixed-term clause remains in effect and requires the employer to pay the employee the compensation they would have earned to the end of the fixed term, without any duty to mitigate.

Each case is decided on its own facts and employers are encouraged to review their employment agreements with legal counsel to consider the impact, if any, that this decision may have.  

It is recommended that employers update their employment agreements on a regular basis, and at least annually.

In all cases, employers are encouraged to seek the guidance of experienced employment counsel when drafting employment agreements.