Termination Clauses and Construction Workers

March 3, 2021

By Brian Babcock

Ontario Courts REALLY dislike termination clauses in employment contracts which attempt to limit how much an employee may receive upon termination. I have written on this topic previously. 

Another recent case is a fresh example that makes this point even more clear.

The construction industry is known for its transient employment. Workers are often terminated when a project is complete. For that reason, they are exempt from the termination pay provisions of the Employment Standards Act (ESA)

In Rutledge v. Canaan Construction Inc., the worker had been employed since 2012, but had been laid off before. In 2015, he signed an employment contract that limited his payment on termination to the minimum amounts of notice under the ESA. When he was laid off in later 2017, he received no notice or pay in lieu of notice. Fortunately, he found new work quickly, so his claim was in Small Claims Court (where, with the increased claim limits, we expect to see more dismissal cases).

The small claims court deputy judge awarded the worker damages representing 9 1/2 weeks salary. That deputy judge found that the termination clause was void as being in violation of section 60(1) (c) of the ESA, which requires an employer to continue benefit plan contributions during the notice period.

This appears to be the first time that the validity of a termination clause has been considered in the context of the construction exemptions. It seems a bit odd that the decision relied upon a denial of benefit contributions, when under the clause, there was no notice period.

The deputy judge reasoned that, for any of several reasons, the worker might have become entitled to notice – for example, a transfer to doing work outside the definition of “construction” under the ESA. The Court of Appeal has already said in earlier cases that even if the worker is not actually entitled to benefits, if they MIGHT be entitled to the benefit, the clause is void. Because of the inequality of bargaining power, the ESA itself provides “no contracting out”.

It was appealed to a single Superior Court judge. That judge not only agreed with the deputy judge’s reasoning, they also added a finding that because the employer might begin to employ more than 50 workers, in which case, the separate severance pay obligations of the ESA kick in, and since the clause tries to exclude severance pay, it is void.

This latter finding has already been criticized as containing an error regarding the entitlement of construction workers to severance pay (see the case comment by Brendan Harvey on canlii.com). However, it does not appear that the case was appealed further to the Court of Appeal.  For a small claims case to go to that higher appeal level requires leave to appeal, which is rarely granted, and only given on matters of general importance. That is a very high threshold, though one that I am sure most construction sector employers would feel is met in this decision.

However, even if it was appealed, the reasoning about the denial of benefits is consistent with prior Court of Appeal decisions, and simply applies it to the construction sector in a way that relies upon currently non-existent hypothetical possibilities to invalidate the clause.

Because of the appeal to the Superior Court judge, this decision has much more weight than if was only a decision in small claims court.

In previous articles, we have pointed out the need to update your employment contracts to try to reflect recent decisions. This case however illustrates that:

  • keeping up with evolving law is a moving target.
  • no matter how well the employer words the termination clause, the courts will favour employees, and attempt to find a reason to ignore the clause in favour of awarding damages.

The target of having a valid termination clause is also hard to hit because employment contracts are largely static, and can only effectively be updated if something new is given to the worker in exchange for the new termination clause.