Employment Agreements for Ontario Employers

One defective sentence in a termination clause can convert a statutory notice obligation of a few weeks into a common law award of many months, for every employee on that template.

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Termination ClausesBonus & Incentive TermsIP & ConfidentialityContractor Agreements

Under section 67.2 of the Employment Standards Act, 2000, non-competition agreements with employees have been prohibited in Ontario since October 25, 2021, subject only to narrow exceptions for defined executives and for the seller of a business.

Employment Agreements

8Weeks

Maximum ESA Notice of Termination

26Weeks

Maximum ESA Severance Pay

3Months

Service Before ESA Notice Applies

2.5$M

Payroll Threshold for Severance Pay

Quick Answer

Why do Ontario termination clauses so often fail?

Because Ontario courts assess the termination provisions as a whole. If any part of them would permit the employer to contravene the Employment Standards Act, 2000 at any point, the entire termination scheme is generally unenforceable, including a compliant without-cause clause. The employee then receives common law reasonable notice, which for senior or long-service employees is usually many months rather than the statutory weeks.

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WHY THE CONTRACT DECIDES EVERYTHING

The Default Is Common Law Notice

In Ontario, an employee dismissed without cause and without an enforceable contractual term is entitled to reasonable notice at common law. Reasonable notice is assessed on the employee's age, length of service, character of employment and the availability of similar work, and for long-service or senior employees it is frequently measured in many months. The Employment Standards Act, 2000 minimums, one week of notice per year of service to a maximum of eight weeks, plus severance pay of one week per year to a maximum of 26 weeks for qualifying employees of employers with an annual Ontario payroll of at least $2.5 million, are a floor and not a ceiling.

A written employment agreement is how an employer limits that exposure, by contracting for a defined entitlement on termination that meets or exceeds the statutory minimums. That is the single highest-value clause in the document, and it is also the one most often drafted defectively. Ontario appellate authority has held that where any part of the termination provisions would permit the employer to contravene the Employment Standards Act, the termination provisions are unenforceable as a whole, including the without-cause portion, even if that portion is compliant on its own and even if the employer never relied on the offending part.

The practical consequence for employers is that a template drafted before 2020 is worth reviewing, and an agreement copied from another jurisdiction is worth replacing. Lexaltico LLP drafts employment agreements, offer letters, executive agreements, incentive plans, contractor agreements and workplace policies for Ontario employers, and reviews existing templates for enforceability.

TERMINATION PROVISIONS

Drafting a Clause That Survives Review

A durable termination clause deals with several things at once. It must provide notice or pay in lieu that never falls below the statutory entitlement, at any point in the employment relationship, including after many years of service. It must continue benefit contributions through the statutory notice period, because failing to do so is itself a contravention. It must address severance pay where the employer meets the payroll threshold. And it must define just cause consistently with the statutory standard, because the Employment Standards Act permits withholding notice only where the employee is guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned, which is a higher bar than common law just cause.

Related traps recur. A clause that ties entitlement to a fixed number of weeks that could eventually be exceeded by the statutory formula fails as service accumulates. A clause requiring active employment on a payment date to earn a bonus may be unenforceable if it removes an entitlement that would have accrued during the statutory notice period. A saving provision that says the clause shall be read to comply with the Act does not rescue a clause that is otherwise contrary to it. And a clause imposed on an existing employee without fresh consideration is unenforceable for want of consideration.

Timing of the agreement

An employment agreement must be presented, and accepted, before the employee starts work. Asking an employee to sign on their first day, or after they have already begun, risks the agreement being unenforceable because the employee received nothing new in exchange for giving up common law rights. Send the agreement with the offer, give reasonable time to review it, and recommend independent legal advice.

RESTRICTIVE COVENANTS

What You Can and Cannot Restrict

Covenant	Status in Ontario employment agreements	Practical guidance
Non-competition	Prohibited by section 67.2 of the ESA since October 25, 2021, except for defined executive roles and for a seller who becomes an employee of the purchaser	Remove from standard templates; use only where an exception clearly applies
Non-solicitation of clients	Permitted; enforceability assessed at common law	Limit to clients the employee actually dealt with, for a defined and reasonable period
Non-solicitation of employees	Permitted; enforceability assessed at common law	Keep the period modest and target direct solicitation rather than all hiring
Confidentiality	Permitted and generally enforceable	Define confidential information; unlimited duration is acceptable for genuine trade secrets
Intellectual property assignment	Permitted and strongly recommended	Include present assignment, waiver of moral rights, and cover pre-existing materials

Two further points on covenants. Including a prohibited non-compete does not simply fail quietly: it creates a contravention argument and can undermine confidence in the rest of the agreement. And Canadian courts will not read down an overbroad restrictive covenant to make it reasonable; an ambiguous or excessive covenant is generally struck out entirely, so drafting narrowly is not a concession but the only way to have something enforceable.

EMPLOYEE OR CONTRACTOR

Classification Is Decided by the Facts

Labelling someone an independent contractor does not make them one. Ontario tribunals and courts examine the substance of the relationship: control over how and when work is done, ownership of tools, the chance of profit and risk of loss, integration into the business, exclusivity, and whether the person is in business on their own account. A misclassified contractor can claim statutory entitlements retroactively, and the Employment Standards Act, 2000 expressly prohibits treating an employee as if they were not an employee.

Canadian law also recognises an intermediate category, the dependent contractor, being someone who is nominally independent but economically reliant on a single principal, typically established through a long and exclusive or near-exclusive relationship. Dependent contractors are entitled to reasonable notice of termination even though they are not employees. Long-standing exclusive contractor relationships therefore carry real termination exposure that many businesses do not price in.

The consequences of misclassification extend beyond employment law: unremitted payroll source deductions, Canada Pension Plan and Employment Insurance liability with interest and penalties, Workplace Safety and Insurance Board premiums, and Employer Health Tax. A properly drafted contractor agreement helps, but it cannot rescue a relationship whose facts are employment. Where a genuine contractor relationship exists, the agreement should still include a clear intellectual property assignment, because the default rule gives copyright to the contractor.

POLICIES AND COMPLIANCE

What Ontario Employers Must Have in Writing

Beyond the individual contract, Ontario imposes written obligations on employers. Under the Occupational Health and Safety Act, employers must have workplace violence and workplace harassment policies and programs, with the policies reviewed at least annually and posted where there are more than five workers. The Accessibility for Ontarians with Disabilities Act requires accessibility policies, training and, for larger organisations, multi-year plans and compliance reports. The Human Rights Code requires accommodation to the point of undue hardship, which is best supported by a documented accommodation process.

The Employment Standards Act, 2000 has added further written policy requirements in recent years for employers above defined employee thresholds, including a written policy on disconnecting from work and a written policy on the electronic monitoring of employees, each with distribution obligations. Requirements for publicly advertised job postings, including disclosure of expected compensation and of the use of artificial intelligence in screening, have also been introduced. Because these thresholds and effective dates have changed repeatedly, employers should confirm their current obligations rather than relying on an older handbook.

A handbook is only useful if it is drafted to be non-contractual where you want flexibility, contractual where you need enforceability, distributed with proof of receipt, and consistent with the individual employment agreements. Contradictions between a handbook and a contract are usually resolved against the employer who drafted both. We prepare policy packages alongside agreements so that they operate together.

ONGOING MANAGEMENT

Changes, Refreshes and Terminations

Unilaterally changing a fundamental term of employment, such as compensation, role, reporting line or location, can amount to constructive dismissal, entitling the employee to treat the employment as terminated and claim notice. Substantive changes should be made with consent supported by fresh consideration, or on notice equivalent to the notice required to terminate the existing arrangement. The same analysis applies when an employer wants to introduce an updated agreement to an existing workforce, which is why refresh projects need to be planned rather than emailed out.

On termination, the mechanics matter as much as the entitlement. The employer must provide the statutory notice or pay in lieu, continue benefits through the statutory notice period, pay accrued vacation, deliver a record of employment within the prescribed time, and where a release is sought, offer consideration beyond the statutory minimum, because an employee cannot be required to release claims in exchange for entitlements they are already owed. Mass terminations, meaning fifty or more employees at an establishment within a four-week period, trigger enhanced notice obligations of eight, twelve or sixteen weeks depending on the number affected.

If you are an Ontario employer, three practical steps are worth taking now: have your employment agreement template reviewed for enforceability against current law, confirm which written policies your headcount requires, and audit any long-standing contractor relationships for dependent contractor exposure. Contact us to review your templates or to plan a workforce change.

COMPENSATION AND TERM

Bonus Clauses, Fixed Terms and Layoffs

Bonus and incentive terms are litigated more often than base salary. Where a bonus forms an integral part of compensation, an employee dismissed without cause is generally entitled to what they would have earned during the notice period, unless the plan language unambiguously removes that entitlement and does not conflict with the minimum standards the Employment Standards Act, 2000 requires during the statutory notice period. A clause requiring the employee to be actively employed on the payment date is frequently insufficient on its own. If a plan is intended to be discretionary, it should say so clearly, be administered consistently with that description, and be drafted alongside the termination provisions rather than in a separate document that no one reconciles.

Equity incentives raise the same issue in a different form. Option and share plans should state precisely what happens on termination with and without cause, on resignation, on death or disability, and on a change of control, and the plan and the employment agreement must not contradict each other. Where the plan is silent or ambiguous, the employee is often found to have continued to vest through the notice period, which can be a substantial and unbudgeted cost in a company that has grown in value.

Fixed-term contracts are riskier than most employers assume. If a fixed-term agreement is ended early and contains no enforceable early termination clause, the employee may be entitled to the wages and benefits for the entire balance of the term, and courts have held there is no duty to mitigate in that situation. A fixed-term contract that rolls over informally at expiry can also be treated as having become indefinite. Unless there is a genuine reason for a fixed end date, an indefinite agreement with a well-drafted termination clause is usually the safer structure.

Temporary layoffs are a further trap. The Employment Standards Act, 2000 sets out when a layoff becomes a termination for statutory purposes, but at common law an employer generally has no right to lay an employee off at all unless the employment agreement expressly permits it or the practice is established in the industry. Laying off an employee without that contractual right can constitute constructive dismissal even where the statutory timelines are respected. Employers who anticipate seasonal or cyclical downtime should build an express layoff provision into the agreement before they need it.

Common Questions

Frequently Asked Questions

Why do Ontario termination clauses so often fail?

Can Ontario employers use non-competition clauses?

Only rarely. Section 67.2 of the Employment Standards Act, 2000 has prohibited non-compete agreements between employers and employees since October 25, 2021, with exceptions for defined executive positions and for a seller of a business who becomes an employee of the purchaser. Non-solicitation and confidentiality covenants remain available and are usually the more effective protection in any event.

When must an employee sign the employment agreement?

Before starting work. If an employee signs after they have already begun, they have given up common law rights without receiving anything new in return, and the agreement can be unenforceable for lack of consideration. Send the agreement with the offer, allow reasonable time to review it, and recommend that the employee obtain independent legal advice.

What is the difference between ESA notice and common law notice?

ESA notice is the statutory minimum: one week per year of completed service to a maximum of eight weeks, plus severance pay of one week per year to a maximum of 26 weeks for employees with five or more years where the employer Ontario payroll is at least $2.5 million. Common law reasonable notice is what a court awards absent an enforceable contract, based on age, service, character of employment and re-employment prospects, and it is generally much higher.

Can I hire someone as an independent contractor to avoid employment obligations?

Only if the relationship is genuinely independent. Classification is determined by substance, including control, tools, chance of profit and risk of loss, exclusivity and integration into the business. Misclassification exposes the business to retroactive statutory entitlements, unremitted source deductions, CPP and EI liability with interest and penalties, WSIB premiums and Employer Health Tax.

What is a dependent contractor?

A dependent contractor is a person who is not an employee but is economically dependent on a single principal, typically through a long exclusive or near-exclusive relationship. Canadian courts treat dependent contractors as entitled to reasonable notice of termination. Businesses with long-running exclusive contractor arrangements often carry significant unrecognised termination exposure as a result.

Which written policies does an Ontario employer need?

Workplace violence and workplace harassment policies and programs under the Occupational Health and Safety Act, accessibility policies and training under the AODA, and, above defined employee thresholds, written policies on disconnecting from work and on electronic monitoring under the Employment Standards Act, 2000. Requirements around publicly advertised job postings have also been added, so current thresholds should be confirmed.

Can I update the employment agreements of existing staff?

Yes, but not unilaterally. Imposing new terms without fresh consideration is unenforceable, and materially changing a fundamental term can amount to constructive dismissal. A refresh is normally implemented with meaningful consideration such as a bonus, raise or promotion, or on working notice, and should be rolled out as a planned project with communication and documentation.

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