Other "F" words: Understanding fixed-terms and failsafe clauses

12 minute read
16 June 2022


Recent developments in employment law necessitate the need for employers to turn their minds to the careful construction of termination provisions within employment agreements. Employers considering using fixed-term contracts should be particularly cognizant of the need for careful drafting and the risks associated with the same. Contracts drafted incorrectly can result in uncertainty and unanticipated cost – including employees being entitled to significantly more compensation upon termination than originally contemplated by the employer when putting pen to paper.

In a recent Ontario Superior Court decision, Livshin v The Clinic Network of Canada Inc., 2021 ONSC 6796, Justice Black struck a "for cause" termination provision in a fixed-term employment agreement because the provision failed to comply with the Employment Standards Act, 2000 ["ESA"]. The provision stated:

c) Termination by the Company for Just Cause – The Company has the right, at any time and without notice, to terminate your employment under this Agreement for just cause.

Justice Black held that the language as drafted violated the ESA by denying an employee their ESA minimum standards. Thus, the clause was void. While the Plaintiff's employment was not terminated for just cause, the court followed the reasoning of the Ontario Court of Appeal in Waksdale v Swegon North America Inc., 2020 ONCA 391, for the proposition that where a "just cause" provision contravenes the ESA, it renders all other termination provisions in the employment agreement unenforceable.

The court went on to apply the approach set out by the Ontario Court of appeal in Howard v Benson Group Inc., 2016 ONCA 256 which was another situation involving a fixed term agreement that contained no provision for early termination.

As a result, the employer was ordered to pay the employee damages representing the unexpired term of the contract – 16 months. The case law is well settled that in the absence of a specific contractual stipulation such damages are not subject to mitigation.

While the Defendant in Livshin argued it could rely on the invalid termination provision because the Plaintiff was a sophisticated party who had negotiated his contract through counsel, Justice Black disagreed. Justice Black concluded that an employee's level of sophistication is no reason to permit employers to draft provisions that contravene the ESA.

Justice Black further rejected the employer's argument based upon the decision in Amberber v IBM Canada Ltd., 2018 ONCA 571 that the offending clause was saved by a subsequent "failsafe" provision which read:

Severability of terms – In the event that any term of this Agreement is found to be unenforceable for any reason, that finding will not affect any other term of this Agreement. If any term of this Agreement is so broad as to be unenforceable, that term will be interpreted to be only as broad as is enforceable

Justice Black held the employer was mistaken in referring to the provision as a failsafe and it could only be properly understood as a severability clause. Note, the differences between a failsafe and a severability clause is discussed in greater detail below.

Following the Ontario Court of Appeal decision in North v Metaswitch, 2017 ONCA 790, Justice Black held that if the termination provision is already void, then there is nothing to which the severability clause can be applied. In other words, a severability clause becomes inoperative where the employment agreement contracts out of or waives an employment standard. Justice Black held that the employer could have drafted a termination provision that complied with the ESA standards and limited the plaintiff's rights on termination. However, the employer failed to do so.

Risks associated with fixed-term employment agreements

Fixed-term employment agreements have a set end date. While such agreements may offer benefits to employers looking to cover short-term job absences, employers must ensure that fixed-term agreement terms are clear and unambiguous. Properly drafted fixed-term employment agreements will govern an employee's employment conditions throughout the duration of the fixed-term. At the end of the term, an employer and employee can end the agreement or sign a new agreement with new terms.

Fixed-term agreements in theory avoid the need to pay an employer notice or pay in lieu of notice upon termination. However, without a valid early termination clause, an employer cannot unilaterally end a fixed-term agreement early without exposure to potential damages. If an employer decides to do so, the employer is likely to find itself facing a claim for the balance owing on the contract term. In some cases, this amount can be significantly more than what an employee may have been entitled to if they were to receive "reasonable notice" at common law.

An enforceable early termination clause within a fixed-term agreement will mitigate the risk that the employer must pay the employee for the remainder of the contract term. Therefore, clear and careful drafting is essential to ensuring employers avoid exposure to greater liability.

A second risk facing many employers who use fixed-term agreements occurs when employment continues beyond the contract end date. At this point, a fixed-term employee arguably becomes an indefinite term employee. If this occurs, the employee is then entitled to reasonable notice of termination of the employment agreement at common law.

The third risk associated with fixed-term agreements derives from the all too common practice of multiple renewals. Employers should be cautious in renewing fixed-term employment contracts. Courts have held that successive fixed-term employment agreements can result in the contractual relationship becoming one of indefinite duration, based on the underlying reality of the employment relationship. In this regard see Ceccol v Ontario Gymnastic Federation, 2001 CanLII 8589 (ONCA). Determining whether an employee is employed on an indefinite basis will depend upon the facts of each case. Employees may well be entitled to common law reasonable notice if a court determines they are in fact an indefinite term employee.

Failsafe and severability provisions

It is fair to suggest that employers have met with mixed success when attempting to rely upon "failsafe" and "severability" provisions in their employment agreements.

Most recently, the Court has been critical of these provisions, including in the decision, Rahman v Cannon Design Architecture Inc., 2022 ONCA 451, which overturned the trial decision that relied upon the subjective intention of the parties to not contravene the ESA (and the fact that the plaintiff was a sophisticated individual who had received legal advice) to override the contractual termination provisions. There are a number of other recent cases where the "failsafe provision" did not carry the day:

As a general proposition, courts are keenly aware of the unequal bargaining power of the parties and typically take the position that saving provisions in termination clauses cannot save employers who attempt to contract out of the ESA's minimum standards.

Obviously the best practice is to ensure that the termination provisions are entirely compliant with the ESA. However, legislation changes from time to time and it is wise to insert provisions that make it clear that the employee will always receive no less than all statutory entitlements.

A failsafe provision provides that regardless of any other terms or conditions within a termination clause, an employee will always receive at least what they are entitled to under the ESA. Failsafe provisions incorporate the ESA minimum standards by reference and ensure that any portion of a termination clause that unintentionally violates the ESA is read-up to comply with the ESA.

Again, a failsafe provision may not be of assistance to the employer if the court finds that the termination provision clearly violates the ESA from the outset.

Not to be mistaken with a failsafe provision, a severability provision acts to save an employment agreement should a court find a clause is unenforceable. Severability provisions are separate from termination clauses. An effective severability provision will "sever" the offending clause from the agreement, while allowing the remaining agreement terms to continue in force.

Note however that the Ontario Court of Appeal in North held that severability provisions have limited effect if the termination clause is void by statute. Thus, it is critically important for employers to draft effective and ESA compliant termination clauses so that a severability provision can function as expected within an employment agreement.

Key takeaways

Livshin acts as a reminder to employers to remain aware of the risks associated with fixed-term employment agreements and to utilize these agreements only where appropriate. If an employer chooses to implement a fixed-term agreement, it is prudent to include carefully worded early termination and mitigation provisions in order to limit exposure. If the language is unclear, a terminated employee may be entitled to be paid for the remainder of the fixed-term.

A clear failsafe provision can also be a helpful tool in the right circumstances.

Employers should regularly review and update employment agreement terms to ensure continued conformity with the ever-changing employment law legal landscape.

Should you have any specific questions about this article or would like to discuss it further, you can contact the authors or a member of our Employment, Labour & Equalities Group.

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