Unenforceable Termination Clauses & Worker Misclassification: A Cautionary Tale for Employers

As an employer, it is critical to ensure that an employment agreement is properly drafted in accordance with the applicable legislation and correctly sets out the intended employment relationship. If not, there could be serious consequences for an employer in the event of a wrongful dismissal claim.

A recent decision from the Ontario Superior Court of Justice illustrates such consequences and the dangers of an employer not complying with minimum legislative standards regarding an employee’s termination. The Court allowed the employee’s claim in part and awarded damages of approximately $70,000.

Plaintiff Claims He Is Employee of the Defendant, Not Independent Contractor

In the case of Baker v. Fusion Nutrition Inc., the plaintiff formerly worked for the defendant, Fusion Nutrition Inc. The parties’ relationship was governed by a fixed term contract that stated the defendant hired the plaintiff as an independent contractor. The contract also contained a termination clause.

The plaintiff claimed that he was an employee misclassified as an independent contractor under the agreement. He also claimed that the termination clause was unenforceable as it contradicted the minimum standards of the Employment Standards Act.

Plaintiff Sues Employer for Breach of Contract and Employee Entitlements

The plaintiff served the Statement of Claim on the defendant and despite emails from the plaintiff’s counsel to the employer, a Statement of Defence was not filed, and the defendant was noted in default. The plaintiff sought default judgement and damages for breach of contract, unpaid wages, unpaid vacation, unpaid holiday pay, and punitive, aggravated, bad faith and/or moral damages.

Two key issues were before the Court. The first was deciding whether the plaintiff was an employee or an independent contractor, and the second was assessing whether the termination clause was enforceable.

Nature of Working Relationship Found to Be Employer-Employee

The Court found that although the plaintiff had been labelled as an independent contractor in the agreement, the evidence was that the plaintiff met the criteria for the definition of employee and was therefore entitled to damages. The Court’s conclusion was based on various factors, including:

• The plaintiff worked full-time, five days a week, from the employer’s premises;
• He performed work activities that the employer controlled;
• He could not refuse or contract out of the employer’s work;
• He had no opportunity for profit or loss in the performance of his work tasks;
• His pay did not fluctuate regardless of the quantity or quality of his work; and
• He was required to advertise himself as a representative of the employer to customers.

The Superior Court noted that an agreement purporting to describe the nature of the relationship is not determinative on the classification of whether an individual is an employee or independent contractor. Instead, this classification is a question of fact to be determined by the evidence.

Termination Clause Deemed Unenforceable

The plaintiff argued that the termination and notice provisions in the agreement were vague and ambiguous, rendering them unenforceable. He further claimed that the termination clause contracted out of the requirements of the Employment Standards Act when it provided for termination for cause without further payments, and termination with notice, with a fixed notice payment of four months.

The Court noted that a termination clause must comply with the minimum standards under the Employment Standards Act and found that the termination clause in question was unenforceable as it allowed the employer to terminate the plaintiff for cause without complying with such minimum standards. Further, the clause must be clear and unambiguous, but the Court did not need to decide on this matter given that they found the clause to be unenforceable due to its lack of compliance with the legislation.

Court Allows Claim in Part, Employee Awarded Damages

Since the plaintiff was found to be a fixed-term employee, he was entitled to reasonable notice under the Employment Standards Act. Further, as an employee, he was entitled to the earnings he would have received up to the end of the fixed-term contract in the absence of a notice period.

Overall, the Court awarded the plaintiff approximately $70,000 in damages representing the balance of the contract term, unpaid vacation and unpaid holiday pay to the date of termination. The employer was also ordered to pay partial indemnity costs to the plaintiff.

The Court dismissed the plaintiff’s claims for future vacation, future holiday pay, and punitive, aggravated, bad faith and/or moral damages.

Contact Willis Business Law for Trusted Advice on Navigating Employee Termination

The trusted employment lawyers at Willis Business Law provide employers with proactive advice and unique solutions on a variety of employment law matters, including employment contracts and employee termination. The firm’s knowledgeable litigators also skillfully advocate for employers in wrongful dismissal claims.

Located in the heart of Windsor’s financial district, our firm proudly serves clients throughout Windsor-Essex and the surrounding areas. To schedule a confidential consultation with a member of our employment law team, contact us online or call us at 519-945-5470.