How Employer Unfair Conduct can Invalidate Employment Contract

In Ontario, employment lawyers typically deal with wrongful dismissal claims involving negotiating a severance package. Many of these cases involve legitimate disagreements as to an employee’s entitlements to termination pay and severance pay, which usually turns on whether the employer’s obligations’s are restricted by a valid termination clause in an employment contract. In other words, an employer believes the employee is not entitled to their full severance package under common law based on the existence of an employment contract termination clause.

But does it matter how sincere the employer’s belief is in their ability to rely on a termination clause to limit an employee’s severance package? And will the courts disregard an otherwise valid termination clause if the employer fails to comply with it?

What is Repudiation of an Employment Contract by an Employer?

Repudiation of a contract, whether an employment contract or otherwise, occurs by the words or conduct of one party to a contract that show an intention not to be bound by the contract.

The test is whether, considering surrounding circumstances, including the nature of the contract, the motives which prompted the purported breach, and the impact of the party’s conduct on the other party, a reasonable person would conclude that the breaching party no longer intends to be bound by the contract with the result that the innocent party would be deprived of substantially the whole benefit of the contract. A party can repudiate a contract without subjectively intending to do so, because the assessment is made objectively (Remedy Drug Store Co. Inc. v. Farnham, 2015 ONCA 576).

As one court specifically put it:

“The test for repudiation of contracts in general and employment agreements in particular is neither new nor particularly controversial. Parties will be held to have repudiated an employment agreement if by their conduct they have demonstrated their “clear intentions to no longer be bound” by the terms of the employment agreement (per Gillese J.A. in Roden v. Toronto Humane Society 2005 CanLII 33578 at para. 50). In my view, the conduct of the defendant cited by the plaintiff is a long, long way from meeting this standard of repudiation of an employment contract.”

Cases where the Courts Upheld a Termination Clause Despite an Employer’s Failure to Follow

In Oudin v. Le Centre Francophone de Toronto, 2015 ONSC 6494, the court refused to find repudiation of the employment contract based on a simple arithmetic error by the employer in calculating the values of the employee’s severance pay, amounting to less than a weeks’ pay out of 21 weeks owed.

In Kerzner v. American Iron & Metal Company Inc., 2017 ONSC 4352, the court found that the employer did not legally repudiate an employment contract where the parties were simply disputing the employer’s compliance with post-termination amounts owed.

In Singh v Clark Builders, 2025 ABKB 3, the court found that the parties were engaged in settlements negotiations, where the existence of just cause was a live issue. Therefore, the employer’s failure to pay the employee 90 days’ pay in lieu of notice under the Employment Contract was not a repudiation of the employment contract because it believed in good faith there was just cause for dismissal and the parties were in the process of attempting to negotiate a settlement.

Cases where the Courts Have Struck Down a Termination Clause Despite an Employer’s Failure to Follow

On the other hand, there are some wrongful dismissal cases where the courts have found that an employer who fails to unconditionally pay an employee the pay in lieu of notice to which they are contractually entitled demonstrates an intention to no longer be bound by the contract.

In Perretta v. Rand A Technology Corporation, 2021 ONSC 2111, Justice Sanfilippo addressed a very similar circumstance to the case before me. The parties signed an employment contract that provided the employee with two weeks’ notice, in addition to her minimum entitlements under the Ontario Employment Standards Act, 2000 (“ESA“). The employer remitted the employee’s ESA entitlements but withheld the remaining 2 weeks unless she signed a release, which the employer repeatedly requested. In that case, the court held that the employer’s failure to remit the entire amount owing constituted a repudiation of that the employee’s employment contract, and that the employee was therefore entitled to common law reasonable notice. In doing so, the court stated:

“I am satisfied that a reasonable person assessing the Defendant’s conduct would conclude that in demanding that its employee execute a Full and Final Release and comply with the terms of an “Enhanced Severance” offer as preconditions to receiving the two weeks’ pay to which the employee was contractually entitled, Rand no longer intended to be bound by the 2018 Employment Contract. I reach this conclusion accepting Rand’s admission that it made a mistake. Even if Rand’s mistake was innocent and resulted from a simple lack of understanding of the very employment contract that it had drawn, and even if I accept Rand’s evidence that it did not understand its obligations at law until so advised by counsel for its employee, that does not exhaust the analysis. My assessment is whether the Defendant’s conduct evidenced an intention not to be bound by the 2018 Employment Contract, assessed objectively. It does.”

In another recent case called Klyn v. Pentax Canada Inc., 2024 BCSC 372, the court dealt with another situation where an employer does not follow the terms of a written employment contract and then attempts to rely on it later. In this case, the employee initially started working with the company as an independent contractor in 2001, before transitioning to an employee role in 2007, at which time he signed an employment contract. His pay was based solely on commissions, and the contract contained a generous severance clause, ensuring he would receive the greater of either the minimum entitlements specified under the minimum employment legislation, or 4 weeks’ compensation for each year of service prior to the employment contract’s signing, plus an additional 4 weeks per year worked as an employee. This severance could be capped at a maximum of 18 months’ severance pay. His compensation was calculated as the average of the commissions he had earned during the two fiscal years preceding his termination.

In 2014, the employer revised his compensation structure, offering him a fixed salary of $100,000 along with new commission rates. His employment was terminated without cause in April 2022, accompanied by a termination letter that included a full and final release with several stipulations, such as a monthly reporting requirement for mitigation efforts and a condition that he sign the release within seven days to be eligible for his severance pay. After his dismissal, the employer failed to provide the employee with his commission payments, only disbursing his base salary from April through July. By July, the employer stopped all payments to the employee, likely due to his failure to comply with the mitigation reporting requirements, even though the employer did not express any concerns regarding the employee’s mitigation efforts.

In resolving the wrongful dismissal claim, the court found that the employer had effectively repudiated the employment contract through its actions following the employee’s termination. It was clear that the employee was entitled to commission payments as part of his severance, yet the employer failed to provide any justification for withholding these commissions during the notice period.

The employer’s refusal to honour the payments specified in the termination clause was also deemed to be a violation of the employment agreement, constituting repudiation.

In this case, the court ruled that the employee was entitled to common law notice due to the employer’s repudiation of the contract. The tribunal awarded the employee $469,166.12, a significantly higher amount than what he would have received based on the contract’s formula for averaging his earnings over the last two years. In calculating this amount, the court concluded that his actual income had been impacted by performance issues with one of the products he sold, so it adjusted his average earnings by a factor of 1.5 to better reflect his potential income under normal circumstances.

Additionally, the court imposed a punitive damages award of $25,000, recognizing that the employer’s actions as a whole merited this penalty. The court held that one of the most troubling aspects of the employer’s conduct was its insistence that the employee sign a full and final release within seven days in order to receive any severance benefits. The court found that this language implied that the employee’s entitlement to benefits was conditional upon signing the release, even if the employer continued payments after the employee’s failure to do so. This language was designed to take advantage of the employee’s uncertainty during the termination process, pressuring him into making concessions that primarily benefited the employer. Beyond this, the employer’s cessation of termination payments and the delay in providing the employee with access to his deferred profit-sharing plan further compounded the employer’s misconduct, justifying the punitive damages award.

This case is yet another nudge for employers wishing to rely on the termination clauses in their employment contracts to ensure they have properly prepared paperwork. Most importantly, it is another example of how the courts will look down upon an employer’s failure to comply with termination clauses they agree upon, resulting in not only a full severance package to their former employee, but aggravated/moral damages or punitive damages for unfair conduct.

Despite the fact that an employment contract contained enforceable termination language, the British Columbia Supreme Court recently found that an employee was entitled to common law reasonable notice and $25,000 in punitive damages as a result of the employer’s repudiatory conduct towards the employee.

Conclusion

In employment law, an employer’s repudiation occurs where the company breaches a fundamental contractual term or behaves in a manner that shows a clear intention to no longer be bound by its obligations under the contract. If that occurs, the employee has the option to accept the repudiation, in which case the employment contact is deemed legally terminated, relieving both parties from their future obligations to one another.

A repudiation can happen in various scenarios, including significant changes to an employee’s terms and conditions of employment resulting in a constructive dismissal claim, and just as often, after termination of employment. In the latter context, a significant consequence is that the employer may not be able to rely on the termination clause in the employment contract, entitling the employee to their full severance package entitlements under common law. Finally, this case also serves as yet another reminder for employers about the importance of acting in good faith, especially throughout the termination process and the potential repercussions for failing to do so. By following these principles, employers can minimize the risk of potential disputes where they cannot rely on otherwise enforceable termination clauses because of its unfair conduct.

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 simply need guidance on your rights and obligations for a severance package review and negotiation, our experienced employment lawyer is here to assist you.

Book a confidential consultation with our Toronto employment law firm to protect your legal rights to understand your options and protect your rights.

Why Choose Bune Law When You Need an Ontario Employment Lawyer?

Experience in all areas of workplace law, including wrongful dismissal claims, constructive dismissal claims, severance package reviews, severance package negotiations, discrimination and human rights disputes, and employment contract reviews, including navigating the important issue between just cause vs. wilful misconduct in Ontario employment law.
Proven track record of successfully resolving workplace disputes through negotiation, mediation, and employment litigation.
Compassionate and personalized approach to each case, ensuring tailored solutions that meet your specific needs.

If you need a Toronto employment lawyer who is committed to delivering strong results and proactive solutions, please contact Bune Law online or by phone today at 647-822-5492.