Ontario Courts to Employers: Update Your Contracts or Pay the Price

Ontario Courts to Employers: Update Your Contracts or Pay the Price By Tahir Khorasanee, LL.M. Senior Associate, Steinbergs LLP Ontario employers are being put on high alert: outdated, vague, or improperly drafted employment agreements are increasingly being rejected by courts, often at great cost to the employer. A wave of recent decisions, including two in June 2025, has reaffirmed that poorly worded termination and layoff clauses can leave employers on the hook for significant severance obligations. In one case, the Ontario Superior Court awarded 16 months' notice to an employee who had been placed on a temporary layoff during the COVID-19 pandemic. The employer assumed it had the right to lay off the employee due to the pandemic's exceptional circumstances. However, the court found that because the employment agreement did not contain a valid and enforceable layoff clause, the layoff constituted a constructive dismissal. In another high-profile decision, the Township of Ignace was ordered to pay damages in a wrongful dismissal suit after failing to comply with contractual and statutory obligations. The employee was dismissed without sufficient cause or notice, and the municipality's failure to adhere to the Employment Standards Act (ESA) requirements proved costly. These rulings underscore a broader legal trend in Ontario: the courts are scrutinizing employment contracts more rigorously than ever, and any clause that fails to comply with the ESA may be deemed unenforceable in its entirety. Why Contracts Are Being Struck Down Under the ESA, employees are entitled to minimum protections regarding termination, notice, severance, and conditions of layoff. If an employment agreement includes language that even potentially denies or undercuts those entitlements, it risks being void. One common example is a "just cause" termination clause that defines cause more broadly than the ESA. Because the ESA has a higher threshold for when notice can be withheld, these overreaching definitions can lead to the entire termination provision being invalidated. Similarly, layoff clauses must explicitly authorize the employer to place an employee on a temporary layoff in accordance with the ESA. If the agreement is silent or ambiguous on this right, any layoff may be interpreted as a constructive dismissal, triggering full common law notice obligations. Key Clauses That Must Be Updated Legal experts now urge employers to review the following clauses in all employment agreements: Layoff Clauses: Must expressly permit layoffs under ESA terms. Without it, employers risk exposure to constructive dismissal claims. Termination Clauses: Must clearly state that employees will receive at least ESA minimums, and must not attempt to contract out of those minimums either directly or indirectly. Just Cause Provisions: Avoid overly broad language. Limit definitions to what the ESA recognizes. Severability Clauses: Although helpful, they will not save a termination provision that violates ESA minimums. Real-World Impact When a contract is struck down, courts do not revert to some "middle ground." Instead, they fall back on the common law, which typically awards one month of notice per year of service, and sometimes significantly more depending on the employee's age, position, and job market conditions. For example, in the COVID-related case, the terminated employee had a relatively short tenure but was still awarded 16 months of pay because the court found the layoff unjustified and the termination clause unenforceable. This is a stark reminder that employees don’t need decades of service to be awarded lengthy notice periods. Broader Context: Uncertain Economy, Increased Scrutiny These decisions come at a time of economic uncertainty, where layoffs, restructurings, and cost-cutting are common. Employers that rely on outdated contract templates are particularly vulnerable. The pandemic shifted the legal landscape. It exposed just how many employers failed to include valid layoff language in their contracts. Now courts are closing the door on those arguments. Moreover, the courts are showing less willingness to "blue pencil" or fix flawed clauses. Instead, they are invalidating entire sections, resulting in greater liability than many employers anticipate. Practical Tips for Employers If you're an employer in Ontario, here are steps to reduce risk: Audit Your Existing Agreements: Especially for long-standing employees. Even minor language issues can render termination clauses void. Use ESA-Compliant Language: Clauses must reflect the exact language and requirements of the ESA. Courts look at technical accuracy. Clarify Just Cause and Termination Rights: Ensure your contracts don’t appear to waive ESA rights or exaggerate your grounds to terminate without notice. Include Layoff Provisions: If you foresee needing flexibility during economic downturns, ensure temporary layoffs are explicitly permitted. Consult Employment Counsel: Generic templates downloaded from the internet may not be valid in Ontario. Legal review can save six-figure payouts. The Bottom Line In both the COVID layoff and Ignace cases, employers relied on outdated or unenforceable agreements. The result? A common law windfall for the employees and avoidable legal costs for the employers. As more employment cases arise post-pandemic, courts are sending a clear message: contracts must be clear, compliant, and current. A few pages of well-drafted language can mean the difference between a manageable notice payout and a six-figure judgment. For Ontario businesses, the time to act is now. Review your employment agreements, revise your contracts, and protect your business before it becomes the next cautionary tale in a courtroom. Because in 2025, ignorance of contract law is not just costly—it’s entirely avoidable.