The Ontario Court of Appeal has once again confirmed that termination clauses in employment contracts must strictly comply with the Employment Standards Act, 2000 (ESA).
In D. v. Arista Homes Limited, 2025 ONCA 260, the court found that a termination clause was unenforceable because it allowed the employer to terminate employment in circumstances that did not meet the ESA’s minimum requirements. As a result, the employee was entitled to common law reasonable notice rather than the much smaller amount set out in the contract.
For employees, the decision is another reminder that employment contracts often contain termination provisions that do not hold up in court, even when employers believe they are legally compliant.
Background
The employee worked for the defendant homebuilder for approximately four years and nine months before her employment was terminated without cause.
Following the dismissal, the employer provided four weeks’ pay in lieu of notice, which reflected the employee’s minimum entitlement under the ESA. The employer relied on the termination provisions contained in the employment contract.
The employee challenged those provisions and argued that they violated the ESA. She brought a motion seeking common law reasonable notice rather than the limited amount available under the contract.
The motion judge agreed and awarded the employee eight months’ pay in lieu of notice. The employer appealed the decision to the Ontario Court of Appeal.
Why the Termination Clause Failed
The dispute focused on the wording of the contract’s termination-for-cause provision.
The clause stated that the employer could deny notice or severance if the employee was terminated for “Cause” or if the employee engaged in certain forms of misconduct, including a breach of the employment agreement.
The Court of Appeal agreed with the motion judge that the wording created separate grounds for dismissal because the clause used the word “or.” This meant the employer could potentially rely on a breach of the employment agreement even where the employee’s conduct would not meet the stricter ESA standard for denying termination pay.
Under the ESA, employees lose their entitlement to notice only in limited circumstances involving wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned by the employer.
Because the contract permitted termination without notice in broader circumstances than those permitted by the ESA, the clause was unenforceable.
The Court of Appeal’s Decision
The Court of Appeal dismissed the employer’s appeal.
The court emphasized that employment contracts must be interpreted according to the ordinary meaning of the words used. It rejected the employer’s argument that the clause should be interpreted as ESA-compliant simply because the employer intended it to comply with the law.
The court explained that the issue is not whether an employer intended to follow the ESA, but whether the actual wording of the contract complies with the legislation.
The Court of Appeal also reaffirmed an important principle of Ontario employment law: where there is ambiguity in an employment contract, that ambiguity will generally be interpreted in favour of the employee. This reflects the reality that employers typically draft employment contracts and employees often have little opportunity to negotiate their terms.
Key Takeaways for Employees
This decision highlights several important points for employees.
First, termination clauses are often unenforceable even when they appear valid at first glance. Courts carefully review the wording of these provisions and will strike them down if they provide less protection than the ESA.
Second, employers cannot rely on statements that they intended to comply with employment standards legislation. The wording itself must comply with the law.
Third, small drafting choices can have significant consequences. In this case, the court’s analysis focused on the placement of specific words and the overall grammatical structure of the clause.
Finally, if a termination provision violates the ESA, an employee may be entitled to common law reasonable notice rather than the lesser amount set out in the contract. Depending on the circumstances, this can result in substantially greater compensation following a dismissal.
Why This Case Matters
Many employees assume that the termination clause in their employment contract automatically limits what they can receive after losing their job. This decision demonstrates that such assumptions can be costly.
A termination clause that appears enforceable may not withstand judicial scrutiny. When a clause violates the ESA, employees may be entitled to significantly more compensation than the employer initially offers.
For that reason, employees should be cautious about accepting a termination package before obtaining legal advice. A review of the employment contract may reveal that the employer’s position is not supported by the law.
Contact Monkhouse Law Employment Lawyers
If you have been dismissed from your job and your employer is relying on an employment contract to limit your severance, it is important to understand whether that contract is enforceable.
The employment lawyers at Monkhouse Law Employment Lawyers assist non-unionized employees across Ontario with severance packages, wrongful dismissal claims, and employment contract reviews.
Contact Monkhouse Law today for a free 30-minute consultation to learn about your rights and options following a termination.