The highest court in Ontario recently ordered an employer to pay out a whopping three years of compensation to a 23-month employee terminated without cause. The employee was entitled to his full salary and benefits for the remainder of the five-year fixed-term employment contract. The contract did not clearly say otherwise. In Howard v. Benson Group Inc., this meant the employer had to pay over $200,000 in damages.
Facts
The employer runs an automotive service center. It hired the employee as a truck shop manager. The parties entered into a five-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. Because of 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 of Canada.
The employee appealed, arguing that he was entitled to be paid his lost earnings to the end of his contract. The much lower amount (because of his short service) for a reasonable notice period under the common law should not apply. Nor should the common law duty to reduce or mitigate damages apply, the employee argued.
Decision
The Ontario 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 appeal court 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 because of its vagueness, the general rule applied.
The court rejected the employer’s argument that such a judgment 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 appeal court ruled that the employee did not have a duty to reduce or mitigate his damages by finding other work.
Generally, in a wrongful dismissal in Canada, the employee is obligated to take reasonable steps to minimize his or her 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.
• Employee-friendly courts: 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 it.
• No duty to mitigate with fixed-term contracts: Unless there is a clear contractual requirement, there’s no duty to mitigate with a fixed-term contract. So think twice about any without-cause termination of employees on fixed-term contracts.
