Just Cause vs. Wilful Misconduct

Most Ontario employment lawyers acknowledge that it is generally difficult for employers to prove “just cause” for dismissal of an employee, as well as its consequences. However, what happens to termination clause in an employment contract if an employer alleges just cause for dismissal but is unable to prove it? Also, what is the difference between just cause vs. wilful misconduct?

Just Cause vs. Wilful Misconduct

Under Ontario employment law, an employer has the right to terminate an employee for misconduct in one of two main ways that highlights the main difference between just cause vs. wilful misconduct:

Employee who is guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and that has not been condoned by the employer, under the Ontario ESA. In such cases, an employer is not required to provide the statutory minimum notice of termination or pay in lieu (called a “severance package“). Put simply, under this stringent test for termination, an employer must prove on a balance of probabilities:
1. The employee’s conduct is wilful (e., the employee intended the result that came to pass).

1. The employee is guilty of:
  - misconduct (e.g., fraud, theft, alcohol or drug use, conflict of interest, failure to follow a clear and significant company policy); or
  - disobedience, or
  - neglect of duty
2. The employee’s conduct is not trivial (i.e., unimportant or insignificant)
3. The employee’s conduct has not been condoned by the employer (i.e., the employer knows about the employee’s behaviour but does not act on it, thereby giving the employee the impression that the behaviour is not serious enough to warrant termination).

Just Cause under Common Law. This refers to serious misconduct that serves to disentitle an employee from notice of termination or pay in lieu of notice (severance package). However, while the standard is high for employers to prove just cause, it is less onerous than the above standard of “wilful misconduct, disobedience or wilful neglect of duty” standard under the Ontario ESA. In other words, it is important to note that this exemption under the Ontario ESA is narrower than the “just cause” concept applied in the common law. This could mean that a court in a wrongful dismissal claim may find that there was just cause to dismiss an employee, but this does not necessarily mean that the exemption in Ontario ESA applies. Thus, poor work or conduct that is accidental or involuntary will generally not be considered to be wilful to disentitle an employee from their minimum statutory entitlements to termination pay and severance pay under the Ontario ESA. However, an employee who is reckless in their conduct may be guilty of wilful misconduct if that employee knew or ought to have known that their conduct would cause the result that came to pass.

Proving Just Cause for Dismissal under Common Law – Case in Point

In the recent case, the court in Pirani v. CIBC, 2023 ONSC 5991 upheld an employer’s decision to dismiss an employee for just cause, while also reaffirming the rule that an employer’s failure to establish just cause does not automatically render a termination clause unenforceable. This case also serves as an important reminder that anytime an employer wants to terminate an employee with just cause, it is important to carefully assess and substantiate the grounds for just cause before proceeding with dismissal.

Background Facts

The employee, who held the position of Senior Financial Services Representative, had been employed with the bank for over eight years. Her employment contract stipulated that she was required to comply with all of the employer’s policies and procedures, which were made available to her throughout her tenure.

During her time at the bank, the employee received two formal written warnings for non-compliance with the employer’s internal procedures. The first warning was issued due to her failure to review overdraft reports and take necessary actions on an overdrawn client account. The warning emphasized the need for her to “immediately adhere to all procedures,” not only the ones she had previously violated. Additionally, the employer indicated that ongoing reviews would be conducted to ensure her future compliance. Subsequently, a second and final warning was issued after the employee was found to have accessed credit bureau records for clients without obtaining their signed consent.

After receiving the final warning, the employee was terminated for cause. In response, she filed a claim for wrongful dismissal, seeking damages, including extraordinary damages. During the trial, she argued that her employment contract was effectively repudiated by her dismissal for cause. She also contended that the termination clause in her contract was unenforceable, asserting that she was still entitled to her minimum statutory rights under the Ontario ESA, even though she had been terminated for cause.

Just Cause for Termination

The court rejected the employee’s claim for wrongful dismissal, concluding that the employer had valid just cause to terminate her employment. In reaching this decision, the court considered several key factors:

Awareness of Policies and Procedures: The employee was fully aware of the employer’s policies, rules, and procedures. She had access to annual training, coaching sessions, opportunities to seek clarification, and additional resources to ensure her understanding of the requirements.
Reasonableness and Clarity of Employer’s Rules: The Court found that the employer’s policies were not only reasonable but also clear, unequivocal, and specifically designed to safeguard client privacy in line with legal obligations.
Repeated Violations Despite Warnings: The employee was fully aware of the potential consequences of violating the employer’s policies, yet she knowingly continued to breach them, despite prior warnings.
Dishonesty and Misleading Conduct: The employee engaged in dishonesty, specifically by misleading a client, which undermined the trust the employer had placed in her.
Progressive Discipline Process: The employer followed a fair and progressive discipline process, thoroughly documenting all verbal coaching, policy violations, and formal written warnings.
Commitment to Compliance: Both in her employment agreement and in the written warning, the employee had expressly committed to adhering to the employer’s policies and procedures.

The Court also emphasized that the employment relationship was grounded in professionalism, trust, and integrity, principles that were especially crucial given the sensitive nature of the personal financial information the employee managed. These expectations were explicitly outlined in the employment agreement and were also implied as part of the duties associated with her role.

The employee’s repeated failure to follow established policies not only exposed the employer to significant risks—such as fraud, privacy violations, and damage to its reputation—but also compromised the integrity of the business. Given the severity of these risks, the Court determined that the dismissal was an appropriate and proportionate response to the harm caused.

Finally, the court ruled that the employee was not entitled to aggravated/moral damages for mental distress, because the employer had acted reasonably throughout the disciplinary process.

Enforceable Termination Clause and No Repudiation of the Employment Agreement

The court rejected the employee’s argument that her employment contract had been repudiated when the employer dismissed her for cause, and as a result, the employer cannot rely on the termination clause to restrict her severance package entitlements.

At trial, the employee contended that if the employer failed to prove just cause for her dismissal, it would have amounted to a repudiation of the employment agreement. According to this line of reasoning, the employer would then be precluded from relying on the termination clause in the contract. However, the court disagreed, citing a previous case in which it was affirmed that “the employer’s inability to establish just cause does not prevent the employer from enforcing an otherwise valid termination provision that allows for termination without cause.”

Additionally, the Court noted that the Ontario ESA did not apply to the employee because her employer was federally regulated. Consequently, her employment fell under the jurisdiction of the Canada Labour Code, which does not make the same distinctions between “for cause” and other forms of misconduct (such as “wilful misconduct, disobedience, or wilful neglect of duty” that is non-trivial and uncondoned by the employer). Therefore, the termination clause in the employee’s contract was found to remain enforceable.

Key Takeaways

The Pirani decision is a favourable one for employers, as it underscores the responsibility of employees to demonstrate repudiation of their contract. It also confirms that an employer’s failure to prove just cause does not automatically render an otherwise valid termination clause unenforceable.

Nevertheless, it is important to note that employers still bear the burden of proving just cause, which remains a high threshold to meet. Employers should take the following critical steps to strengthen their position in such cases:

Clarify and Communicate Policies and Procedures. Employers must ensure that their expectations are clearly articulated in written policies and consistently communicated to employees. As highlighted in Pirani, annual training programs can be an effective tool for reinforcing these expectations, giving employees the chance to ask questions and fully understand their obligations. Moreover, any breaches of policy should be addressed consistently to avoid sending mixed messages to employees.
Explicitly Require Compliance in Employment Agreements. Employers should consider including a clear requirement in employment agreements that employees must adhere to company policies and procedures. This can further emphasize the importance of compliance and create an additional layer of accountability.
Document Progressive Discipline Thoroughly. Employers should ensure that all aspects of the progressive discipline process are well-documented. This includes not only written warnings but also records of coaching sessions, verbal warnings, and instances of policy violations. Clear documentation should also outline the consequences for continued breaches, so that employees fully understand the gravity of their actions and the potential repercussions.

Book a Consultation with an Employment Lawyer in Toronto

At Bune Law, we understand and are familiar the complexities of workplace law and are committed to helping both employers and employees navigate these challenges, including understanding just cause vs. wilful misconduct. Whether you are an employer or employee dealing with employment contracts, workplace disputes like a wrongful dismissal or constructive dismissal, or simply need guidance on your rights and obligations for a severance package review and negotiation, our experienced employment lawyer is here to assist you.

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