The Ontario Court of Appeal recently ordered an employer pay about a whopping 3 years of compensation to a 23-month employee terminated without cause. The poorly drafted employment contract meant that the employee was entitled to his full salary and benefits for the remainder of the 5-year fixed term. In Howard v. Benson Group Inc 2016 ONCA 256 (PDF) this came to over $200,000 in damages.
The employer, which runs an automotive service centre, hired the employee as a truck shop manager. The parties entered into a 5-year fixed-term contract. The employee was to earn $60,000 per year plus benefits.
The employer terminated the employee without cause, 23-months into his employment.
The employee sued for breach of contract. He sought payment of his compensation for the balance of his contract term.
The employer argued that the employment contract expressly provided for early termination. It contained a clause that allowed the employer to terminate the contract early in exchange for the minimum severance amount allowed by statute.
Significantly, the motion judge held the early termination clause, which referred to severance “in accordance with the Employment Standards Act of Ontario“, was too vague to be enforceable. Due to the ambiguity of the clause, it was deemed to be cut from the employment contract. Instead, the judge held the employee was owed a reasonable notice period in accordance with the common law.
The employee appealed, arguing that he was entitled to be paid his lost earnings to the end of his contract; not the much lower amount for a reasonable notice period under the common law. Nor should the common law duty to reduce or mitigate his damages apply, he argued.
The Court of Appeal sided with the employee. It found that not only was he entitled to be paid to the end of the employment contract, but also there was no obligation on him to reduce or mitigate his claim by obtaining other work.
Paid out to the end of the employment contract
The Court of Appeal found the motion judge erred in awarding common law severance. The Court set out the general rule regarding fixed-term employment contracts: absent a clause that clearly limits it, the employee’s entitlement is to the compensation he would have earned to the end of the contract. As the early termination clause was not enforceable due to its vagueness, the the general rule applied.
The Court rejected the employer’s argument that such a judgement would provide an unfair windfall to the employee. The employer was a sophisticated party. And it drafted the employment contract. The onus was on the employer to clearly contract out of such an obligation, if that was its intent. Said the Court, where an employer fails to use “unequivocal, clear language, it cannot complain when it is held to the remaining terms of the contract”.
No duty to mitigate
In a double-blow to the employer, the Court of Appeal held that the employee did not have a duty to reduce or mitigate his damages by finding other work.
Generally, in a wrongful dismissal the employee is obligated to take reasonable steps to minimize their losses after termination by finding another job. Yet the Court held employees do not have such a duty when a fixed-term contract is terminated early. The rationale behind this principle is the employee would not receive severance if the contract ran its course. Conversely, should the contract terminate early, the employee is entitled to be paid for the full term, absent a specific clause to the contrary.
Lessons for Employers
- Draft termination clauses carefully: vague and ambiguous termination clauses will be unenforceable. Typically the result of poorly drafted termination clauses may be that the employer is on the hook for common law damages. But the termination of a fixed-term contract can come with a larger price tag.
- In case of an ambiguous clause, the courts will intervene and rebalance the forces between the parties: this decision reinforces the principle that courts take the power imbalance in employment relationships seriously. An employer’s poor drafting of an employment contract will be held against them.
- No duty to mitigate with fixed-term contracts: unless there is a clear contractual requirement. So think twice about any without-cause termination of employees on fixed term contracts.