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Confidentiality, conflict of interest clauses made contract invalid: Ontario court

In the ever-expanding list of reasons that courts find to strike down otherwise lawful employment contracts, an employer was recently doomed as a result of confidentiality and conflict of interest clauses within an employment agreement.

In the recent decision of Henderson v. Slavkin et al., the Ontario Superior Court of Justice found that a termination clause in an employment contract, which limited entitlements upon termination to only the minimums required by the Employment Standards Act, 2000 (ESA), was unenforceable due to the wording of contract provisions related to “confidentiality” and “conflict of interest.”

Each of these provisions included a clause which stipulated that failure to comply would constitute “just cause” for termination without notice or compensation.

Unfortunately for the employer, the conduct described in the confidentiality and conflict of interest clauses did not meet the statutory standard for a just cause termination (without notice), and therefore, the otherwise enforceable termination provisions were struck from the contract. Regrettably, when this happens, the employer is exposed to much higher wrongful dismissal damages owing to the employee, than if the termination provisions within the employment contract had been upheld by the court, underscoring the importance of having expertly drafted employment contracts.

Background

David Slavkin and Melvyn Kellner (the defendants) operated oral surgery dental offices in the Greater Toronto Area and in Bolton, Ont.

In May 2015, the defendants were planning their retirement from private practice and decided to implement new employment contracts for all staff, including Rose Henderson (the plaintiff), such that the employees would know what to expect from the defendants’ impending retirement.

Prior to this, the employer had never implemented written employment contracts.

The plaintiff, who was a receptionist at one of the dental offices since April 1990, signed the new employment contract, which contained a provision limiting her termination pay to the minimum required under employment standards legislation.

In November 2019, the defendants advised their employees that they would be retiring in March 2020, and that all employees would be terminated as of April 2020. The plaintiff filed a lawsuit asserting that the new employment contract she signed in 2015 was unconscionable and contained clauses that were contrary to employment standards legislation. She argued that she was wrongfully terminated and was entitled to common law damages (i.e. significantly more compensation than the minimum set out in her contract).

Court decision

The court began its analysis by restating a well-known employment law principle that, where an employment contract is not consistent with employment standards legislation, it becomes invalid, and the terminated employee becomes entitled to common law damages.

With respect to the termination clause in Henderson’s contract, the court found that it was valid, however the court took issue with the provisions related to “conflict of interest” and “confidentiality.” Both clauses had the following sentence:

“A failure to comply with this clause constitutes both a breach of this agreement and cause for termination without notice or compensation in lieu of notice.”

The above language suggested that the employee may be terminated for cause for breaching the contract provision. In addition, the entire provision also contained word fragments and overbroad wording which was so general that it did not allow the employee to understand what actions would constitute a breach causing a termination for cause without notice.

As a result of the ambiguous language and reference to cause within the conflict of interest and confidentiality clauses of the contract, the entire termination provision was struck, and  Henderson was granted wrongful dismissal damages that far exceeded the minimums set out in her employment agreement.

Bottom line

Employers should not only ensure that their termination clauses are valid, but that every clause in their employment contract complies with employment standards legislation, in order for the agreement to be binding and effective.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.