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Employment Contract Mistakes That Can Cost Employers Hundreds of Thousands of Dollars

Employment contracts are meant to protect both employers and employees. But when termination clauses are drafted incorrectly—even by experienced lawyers, they can backfire in a costly way. A recent Ontario court decision shows just how expensive a poorly worded employment agreement can be, particularly when it involves a fixed-term contract and senior employees.

The case of Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 4522 serves as an important caution for employers across Ontario. It highlights how a single unenforceable termination provision can invalidate an entire clause and expose an employer to significant financial liability.

For employees, the decision reinforces the importance of reviewing employment contracts with an experienced employment contract lawyer or Toronto employment lawyer before signing.

The Tarras Decision: A Costly Outcome for Employers

In Tarras v. The Municipal Infrastructure Group Ltd., the Ontario Superior Court of Justice ruled that an unenforceable termination provision entitled the employee to be paid for the remaining balance of a fixed three-year employment contract.

As a result, the terminated employee was awarded nearly $480,000 in damages, plus vacation pay, incentive compensation, and continued benefits – almost two full years of compensation.

The decision builds on the Ontario Court of Appeal’s landmark ruling in Waksdale v. Swegon North America Inc., which confirmed that if any part of a termination clause violates the Ontario Employment Standards Act, 2000, the entire termination clause is void.

Background: What Happened in Tarras v. TMIG?

Mark Tarras was a professional engineer and one of the former owners of The Municipal Infrastructure Group Ltd. (TMIG). In late 2019, TMIG was sold through a share sale to T.Y. Lin International Canada Inc.

As part of the transaction, Tarras negotiated a new employment agreement with the purchasing company. He accepted the role of Vice-President with:

  • A base salary of $250,000 per year

  • Performance-based bonuses

  • Benefits and vacation pay

The employment contract was for a fixed term of three years, set to end in December 2022. Importantly, the agreement included termination provisions for both “without cause” and “for cause” dismissals.

Just over one year into the contract, TMIG terminated Tarras without cause, effective December 31, 2020.

Tarras then sued for breach of contract and wrongful dismissal, arguing that the termination clause was unenforceable.

Why the Termination Clause Failed

The central issue before the court was whether the termination provisions in the employment agreement complied with the Ontario Employment Standards Act, 2000.

Under Ontario law, an employer can only terminate an employee without notice or severance pay for very limited reasons. Ontario Regulation 288/01 allows termination without notice only where an employee has engaged in wilful misconduct, wilful disobedience, or wilful neglect of duty that is serious and not condoned by the employer.

However, the “for cause” language in Tarras’ employment contract went far beyond this narrow definition. It allowed termination for reasons such as:

  • Repeated failure to perform job duties competently

  • Failure to improve after warnings

  • Refusal to follow reasonable directions

  • Conduct amounting to cause at common law

While some of these may justify termination at common law, they do not necessarily meet the Employment Standards Act, 2000’s strict standard for termination without notice or severance.

Because the contract permitted termination without compensation in circumstances broader than those allowed by the Employment Standards Act, 2000, the court found the “for cause” provision to be illegal.

How One Invalid Clause Voided the Entire Termination Provision

Relying on Waksdale v. Swegon North America Inc., the court held that an unenforceable “for cause” provision invalidated the entire termination clause, even the “without cause” portion.

This is a critical takeaway for employers. Courts do not look at termination clauses in isolation. If one part of the termination framework violates the Employment Standards Act, 2000, the entire clause can be struck down. Therefore, it did not matter that:

  • TMIG terminated Tarras without cause

  • The invalid “for cause” language was never relied upon

  • Tarras was a sophisticated executive

  • Tarras had legal representation when negotiating the contract

According to the court, these are “subjective considerations” and are irrelevant when determining Employment Standards Act, 2000 compliance. What matters is the plain and ordinary wording of the employment contract termination clause.

The Financial Consequences of a Fixed-Term Contract

Once the termination clause was declared unenforceable, the court applied the default legal rule for fixed-term employment agreements.

When a fixed-term employment contract is terminated early and there is no valid termination clause:

  • The employer must pay the employee for the remainder of the term

  • The employee has no duty to mitigate their losses

This is very different from an indefinite-term employment relationship, where employees must make reasonable efforts to find new work.

In Tarras’ case, that meant payment for the remaining 23 months of salary, bonuses, benefits, and vacation pay, totaling $479,166.67.

For employers, this illustrates why fixed-term agreements can be especially risky when not carefully drafted by a knowledgeable employment contract lawyer.

Key Lessons for Employers Drafting Employment Contract

Ontario courts continue to apply a strict, technical approach when reviewing termination provisions. Based on the Tarras decision, here are five critical lessons employers should understand.

1. ESA Compliance Is Mandatory

Employment contracts must meet or exceed the minimum standards set out in the ESA. Any attempt to provide less than what the ESA guarantees will fail.

A Toronto employment lawyer can help ensure termination clauses are fully compliant and enforceable.

2. Employees Cannot Waive ESA Rights

Even senior executives cannot contract out of ESA protections. It does not matter how experienced, sophisticated, or well-paid the employee is.

Courts will not enforce employment contracts that attempt to limit statutory entitlements, regardless of legal advice or negotiation history.

3. One Bad Clause Can Invalidate Everything

Termination provisions in an employment contract are read as a whole. One improperly worded sentence (or even a single phrase) can render the entire termination clause void.

This is why careful drafting and regular contract reviews are essential.

4. Fixed-Term Contracts Carry Higher Risk

Fixed-term employment contracts can be far more expensive to terminate than indefinite-term contracts. If the termination clause is unenforceable, the employer may owe the employee the full balance of the contract.

Employers should consider whether a fixed term is truly necessary, especially for executives and senior employees.

5. No Duty to Mitigate in Fixed-Term Agreements

Unlike indefinite employment, employees terminated from fixed-term contracts are generally not required to mitigate their damages. This significantly increases potential liability.

A severance package lawyer Toronto can help employers understand and manage this risk before termination decisions are made.

Why Legal Advice Matters for Employers and Employees

The Tarras decision is a reminder that employment law is highly technical. Small drafting errors can lead to massive financial consequences.

Employers should work with an experienced Toronto employment lawyer to:

  • Draft enforceable employment agreements

  • Review existing contracts for ESA compliance

  • Assess risk before terminating employees

Employees, especially executives, should consult a wrongful dismissal lawyer or employment contract lawyer before signing an agreement or accepting a severance package.

Key Takeaways

The ruling in Tarras v. The Municipal Infrastructure Group Ltd. reinforces a clear message from Ontario courts: termination clauses must strictly comply with the Ontario Employment Standards Act, 2000, or they will not be enforced.

For employers, the cost of a poorly drafted employment contract can be staggering. For employees, understanding your rights can make the difference between minimal severance and full compensation.

Whether you are drafting a new agreement, reviewing an existing contract, or facing termination, consulting a knowledgeable severance package lawyer Toronto or wrongful dismissal lawyer can help protect your financial future.

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