Court decision on termination clause and punitive damages award

The recent Court decision in Wilds v. 1959612 Ontario Inc. addresses the enforceability of a termination clause contained in the employment contract, as well as the availability of punitive damages. The Court ruled in favour of the employee on both issues, which should serve as a reminder to employers about the potential liabilities they could face in a wrongful dismissal lawsuit.

Background

The plaintiff Barbara Wilds was employed by the defendant Gibson for approximately 4 1/2 months as an executive assistant. She was 52 years old at the time of termination.

Despite being entitled to one week of notice or termination pay pursuant to the Employment Standards Act, 2000 (the “ESA”), Gibson did not pay Ms. Wilds any amounts upon her termination. She commenced a lawsuit for wrongful dismissal in 2021, and brought a motion for summary judgment returnable November 17, 2023. Among the issues determined in the motion for summary judgment were:

1. The enforceability of the termination clause contained in her employment contract, which would limit her entitlements upon dismissal to only three weeks of notice (her minimum ESA notice period plus an additional two weeks); and
2. Her claims for punitive damages arising out of her employer’s failure to provide her with her ESA entitlements and reimbursement for proper business expenses, as well as the late delivery of her record of employment.

The termination clause

A properly drafted termination clause in an employment contract can displace the employee’s entitlement to reasonable notice pursuant to common law. However, where a termination clause is found to violate the ESA, it will be unenforceable.

In recent years, the law on termination clauses has seen substantial movement towards the side of employees, with many termination clauses being found to be unenforceable. When a termination clause in an employment contract is unenforceable, the employee will be entitled to reasonable notice of termination pursuant to common law, rather than being limited to the entitlements specified in the contract.

In the Wilds case, the employee was subject to both a “termination without cause” provision and a “termination with cause” provision, both of which were found to be unenforceable by the Court. The Court’s reasons included the following:

1. The “termination without cause” provision states that if pay in lieu of notice is provided, Ms. Wilds “will receive only base salary and employment-related health and dental benefits for the applicable period”. This excludes vacation pay, bonus and the other benefits that Ms. Wilds was entitled to, constituting a breach of the ESA;

2. The “termination without cause” provision requires Ms. Wilds to execute a release in exchange for pay in lieu of notice, including her ESA entitlements. The employer’s obligation to provide ESA entitlements is not contingent on the execution of a release, and requiring such a release constitutes a breach of the ESA; and

3. The “termination with cause” provision contains categories of just cause for dismissal without notice that fall short of the statutory exemptions to providing minimum notice under the ESA.

Consistent with previous cases, the Court found that a “saving provision” in the contract did not prevent the termination clause from being unenforceable. The saving provision stated the following:

“It is intended that this termination provision includes any entitlements you have pursuant to the Act.  In the event that your entitlements pursuant to the Act exceed these contractual provisions, those statutory provisions shall replace these contractual provisions and no further payments are required.”

Accordingly, the Court found that Ms. Wilds was entitled to a reasonable notice period of two months pursuant to common law, and was entitled to her full compensation package during that period, including her benefits and bonus.

Punitive damages

Punitive damages are available to the Court to punish a defendant for reprehensible conduct. Doing so is the exception rather than the rule, and will only be done where the following requirements are met:

1. The defendant’s conduct was reprehensible, or was “malicious, oppressive and high-handed”;
2. A punitive damages award is rationally required to punish the defendant and to meet the objectives of retribution, deterrence and denunciation; and
3. The defendant committed an actionable wrong independent of the underlying claim for damages for wrongful dismissal.

The Court found that the employer’s conduct justified an award of punitive damages, citing the following:

1. Gibson failed to comply with the ESA by failing to pay Ms. Wilds her one week of termination pay and applicable vacation pay, and failing to provide her with a record of employment in a timely manner;
2. Gibson failed to reimburse Ms. Wilds for her properly incurred business expenses, without any reasonable basis for denying such reimbursement; and
3. Gibson alleged that the outstanding payments to Ms. Wilds were not paid “due to clerical error”. However, Gibson failed to make these payments to Ms. Wilds prior to the hearing of the summary judgment motion.

In the circumstances, the Court awarded Ms. Wilds punitive damages in the amount of $10,000.00, in addition to her damages for wrongful dismissal.

Conclusion

This case should serve as a reminder to employers of the potential liabilities they face when dismissing employees.

Employers should not assume that an employee’s damages will be limited by the terms of their employment contract, or that the employee will only be entitled to payment in lieu of reasonable notice. Courts may find termination provisions in employment contracts to be unenforceable, and may award punitive damages or other heads of damages where there is a finding that the employer acted in bad faith.

Rudner Law is a Canadian Employment Law firm. They provide clients with strategic advice regarding all aspects of the employment relationship, negotiate and advocate on their behalf, and represent them before courts, mediators, and tribunals. Blog posts are written by Stuart Rudner, the founder and Managing Partner at Rudner Law, Brittany Taylor, Partner, Nadia Zaman, Senior Associate, Geoffrey Lowe, Associate, Alex Minkin, Associate, and David Gelles, Associate.

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