Outdated employment contracts can cost Ontario businesses tens of thousands of dollars in unexpected severance pay. You must regularly audit your contracts to ensure termination clauses strictly comply with the ever-changing Employment Standards Act (ESA), and immediately remove newly voided clauses like blanket non-compete agreements.
For many small to mid-sized businesses in Ontario, an employment contract is something drafted once, saved as a template, and reused for a decade. This “set it and forget it” approach is a massive financial liability. Employment law in this province evolves rapidly through new government legislation and landmark court decisions. What was perfectly legal five years ago might be completely void today.
Whether your business operates in Toronto, London, Hamilton, or Sudbury, judges at the Superior Court of Justice are notoriously strict with employers. 🔍 If even one sentence of your termination clause violates the Employment Standards Act, 2000 (ESA), the entire clause is thrown out. When this happens, employees immediately become entitled to “common law” severance, which can equal up to 24 months of pay. This guide provides a high-level overview of how HR departments should audit their contracts to protect the company.
The Danger of the “Just Cause” Trap
The most common reason employment contracts fail in Ontario today relates to how they handle terminations for cause. Recent landmark court rulings have established that if a contract states an employee can be fired without notice for “just cause,” the clause is highly likely to be illegal and unenforceable.
This is because the ESA uses a much stricter standard called “wilful misconduct, disobedience or wilful neglect of duty.” 🚩 If your contract relies on the broader common law definition of “just cause,” a judge will likely declare the entire termination provision void. Auditing this specific legal language is the absolute highest priority for any human resources department or business owner.
| Contract Clause | Old Standard (High Risk) | Current Ontario Legal Requirement |
|---|---|---|
| Termination for Cause | “The company may terminate you at any time for just cause without notice.” | Must explicitly reference the ESA standard of “wilful misconduct or disobedience.” |
| Non-Compete Clauses | “You cannot work for a competitor for 12 months after leaving.” | Banned entirely for regular employees under the ESA (rare exceptions for executives/business sales). |
| Temporary Layoffs | No mention of layoffs in the contract. | Must explicitly state the employer’s right to temporarily lay off staff, or it may be constructive dismissal. |
Step-by-Step Process for an Internal Contract Audit
Conducting an audit requires meticulous attention to detail. It is highly recommended to have an employment lawyer from our directory review your finalized templates before issuing them to any new hires.
Step 1: Gather and Categorize Existing Contracts
Start by collecting every variation of the employment contracts currently in use. Categorize them by role: executives, management, standard full-time salaried, hourly staff, and independent contractors. Executive contracts have different legal flexibilities (such as allowable non-compete clauses) compared to entry-level retail staff, so they must be reviewed through different lenses.
Step 2: Scrub Illegal Restrictive Covenants
The Ontario government amended the ESA to officially ban non-compete agreements for the vast majority of employees. 📋 If your standard template still includes a clause preventing a departing employee from working for a competitor, it is legally unenforceable and must be removed immediately. Replace it with strong, enforceable “Non-Solicitation” and “Confidentiality” clauses to protect your business assets.
Step 3: Update the Termination Provisions
Carefully review the termination without cause section. Ensure it clearly states that the employee will receive, at an absolute minimum, their exact entitlements to notice, severance pay, and benefits continuation as prescribed by the ESA. Any ambiguity that suggests the employee might receive less than the legal minimum will void the entire agreement in front of a judge.
Step 4: Roll Out New Contracts with “Consideration”
You cannot simply print a new contract, hand it to an existing employee, and demand they sign it. 💵 In Canadian contract law, an employee must receive “consideration” (a new, tangible benefit) in exchange for signing a revised agreement that limits their rights. You must pair the new contract rollout with an annual salary increase, a one-time signing bonus, or a new promotion. If you skip this step, the new contract is entirely invalid.
How Much Does it Cost in Ontario?
Preventative legal maintenance is vastly cheaper than paying a massive common law severance package later. Expect the following estimated CAD costs for a professional audit as of May 2026:
- Template Review by a Lawyer: An employment law firm typically charges $1,000 to $3,000 to review and completely redraft your standard employment contract template.
- Executive Contracts: Custom-drafting complex executive contracts usually costs $1,500 to $4,000 per individual contract.
- Cost of Non-Compliance: If you use a void contract, firing a 10-year employee could easily cost you roughly $80,000 in common law severance, compared to just $15,000 under a properly drafted ESA minimum clause.
How Long Does the Process Take?
A standard HR contract audit is a highly efficient process. ⏱ Gathering your internal documents takes a few days. Once handed over to a specialized employment law firm, you can expect revised, fully compliant drafts back within 2 to 4 weeks. Rolling out the new contracts to existing staff is best done during annual performance review cycles to seamlessly tie the new signatures to yearly salary increases.
Frequently Asked Questions (FAQ)
Does the ESA apply to our independent contractors?
No, genuine independent contractors are not covered by the ESA. However, Ontario courts strictly scrutinize these relationships. If your “contractor” has set hours, uses company equipment, and works exclusively for you, the Ministry of Labour may deem them an employee, exposing you to massive liability.
Can we put a “Right to Disconnect” policy directly in the contract?
Ontario law requires employers with 25 or more employees to have a written Right to Disconnect policy. While it is usually a separate handbook document, clearly referencing the policy and after-hours communication expectations within the contract is a smart legal practice.
What happens if an employee refuses to sign the new updated contract?
If they refuse the new contract and the consideration offered (like a bonus), you cannot unilaterally force them to sign. Your options are to leave them on their old contract, or provide them with full working notice (or severance pay) to terminate their employment entirely.
Are non-solicitation clauses still legal in Ontario?
Yes. While blanket non-competes are mostly banned, you can and should use non-solicitation clauses. These legally prevent a departing employee from actively poaching your clients or trying to hire away your current staff for a reasonable period (usually 12 months).
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