Court examines whether invalid termination clauses made entire contract section unenforceable
Ontario's Superior Court of Justice recently dealt with a significant employment law dispute involving temporary layoff provisions in employment contracts and their relationship to constructive dismissal claims.
The case examined whether such provisions constitute termination clauses subject to Employment Standards Act compliance requirements.
A worker with over a decade of service argued that his temporary layoff constituted constructive dismissal because other parts of his employment contract's termination section violated employment standards legislation.
He maintained that when any portion of termination provisions is invalid, the entire section becomes unenforceable, including temporary layoff clauses.
The worker had been employed by the technology company for eleven years, progressing from lead developer to senior technical consultant.
His employment contract contained a "Termination" section with three clauses: termination for cause, termination without cause with minimum Employment Standards Act (ESA) entitlements, and temporary layoffs stating:
"In the event a temporary lay-off is ever required, it may be implemented in accordance with the requirements of the Employment Standards Act, 2000."
The company experienced severe financial difficulties during 2024, with revenue dropping 60% compared to the previous year.
By February 2024, the worker earned $117,300 annually plus benefits. The chief executive officer requested a temporary 20% reduction in hours and pay.
The worker signed an Agreement for Reduced Hours reducing his salary to $93,840 annually because he feared refusing would result in termination.
The employer's challenges deepened, and beginning April 1, 2024, the company implemented company-wide workweek reductions.
Out of 19 employees, six were placed on full temporary layoff, while ten others received partial layoffs. The worker was placed on temporary layoff for six months, receiving no income though benefits continued.
The worker started legal proceedings in July 2024, seeking dismissal declaration and damages. On September 6, 2024, the employer recalled the worker with salary restored to $117,300.
He returned to work September 30, 2024, but continued his legal challenge, arguing the six-month layoff constituted constructive dismissal.
The worker's argument centred on established law that when any termination provision violates employment standards legislation, the entire clause becomes unenforceable.
Courts have ruled: "An employment agreement must be interpreted as a whole and not on a piecemeal basis." The employer conceded the "termination for cause" provision was invalid, which would normally invalidate all termination provisions.
The worker argued the layoff provision should be considered part of termination provisions because it appeared under the "Termination" heading.
He maintained that at common law, any layoff constitutes constructive dismissal unless expressly permitted.
The worker cited section 56 of the ESA, stating employers terminate employment if "the employer lays the employee off for a period longer than the period of a temporary lay-off."
The employer argued placement under the "Termination" heading was not determinative. They relied on court decisions holding that courts must examine substance rather than formal placement:
"It is irrelevant whether the termination provisions are found in one place in the agreement or separated." The employer pointed to section 56(4) of the ESA, which explicitly provides that temporary layoffs are not terminations.
The judge acknowledged the legal complexity, describing it as "something of a 'chicken and egg' conundrum."
If the layoff provision was valid, the layoff wasn't termination because it was contractually authorised. If invalid, the layoff would constitute constructive dismissal, but determining invalidity depended on whether layoffs are inherently terminations.
The judge concluded that substance, not placement, determines legal characterisation: "The placement of the lay-off provision under the Termination heading cannot be determinative of whether it is a termination clause.
Otherwise, an employer could change the outcome simply by rearranging the headings in the contract."
Drawing on Supreme Court precedent, the court noted: "If an express or an implied term gives the employer the authority to make the change... the change is not a unilateral act and therefore will not constitute a breach.
If so, it does not amount to constructive dismissal." The judge explained: "A lay-off is a termination when there is no clause in the agreement permitting the employer to lay-off the employee. When there is such a clause, the lay-off is not a constructive dismissal."
The judge indicated that had constructive dismissal been found, damages would have been calculated on the original salary:
"An employer cannot circumvent its ESA obligation for pay in lieu of notice by asking the employee to agree to reduced pay in exchange for not being laid off, and then use that agreement to reduce his statutory entitlement."
The judge ultimately dismissed the worker's application, concluding: "The lay-off provision in the 2013 employment contract is not a termination provision, and is therefore not invalid. As such, [the worker] was not constructively dismissed when he was laid off in accordance with that provision."
The decision establishes that properly drafted temporary layoff provisions operate independently from termination clauses, even when grouped together in employment contracts, provided they comply with ESA requirements.
