In the world of Ontario employment law, the enforceability of termination clauses has become a primary battleground. Ever since the landmark decision in Waksdale v. Swegon North America Inc.1, employers have had to grapple with the fact that a single non-compliant termination provision can invalidate an entire termination clause, leaving employers exposed to substantial common law notice liabilities. But does this strict “all-or-nothing” rule apply to temporary layoff provisions? In the recent decision of Taylor v. Salytics Inc.2, the Court of Appeal for Ontario confirmed that a temporary layoff clause is not automatically a termination clause, and that its physical location in a contract is not determinative.

Background

The appellant, Barry Taylor, began his employment with Salytics Inc. under an agreement signed on June 24, 2013, which contained a provision allowing the company to temporarily lay him off. Facing financial distress in 2024, Salytics placed Mr. Taylor on a temporary layoff effective April 1, 2024. During the layoff, Mr. Taylor received no income from Salytics, but his benefits continued. He was eventually recalled to work on a full-time basis and returned on September 30, 2024.

However, while still on layoff, Mr. Taylor applied for a court declaration that the temporary layoff constituted a constructive dismissal and sought damages in lieu of 12 months’ notice. He argued that because Salytics conceded its “for cause” termination clause was invalid—which would thus void all termination provisions in the agreement—the temporary layoff clause was also void because layoffs are simply a “species” of termination. The application judge dismissed his claim, and Mr. Taylor appealed. The Court of Appeal dismissed the appeal, affirming that temporary layoffs under the Employment Standards Act, 2000 (the “ESA“) are distinct from terminations.

The Decision

Temporary Layoffs are Statutorily Distinct 

The Court of Appeal rejected the argument that any layoff clause in an employment agreement is automatically a termination clause. It highlighted that the text of the ESA itself draws a clear distinction between terminations and temporary layoffs. A temporary layoff that complies with statutory limits is excluded from the definition of a termination. Because the clause in Mr. Taylor’s agreement specifically permitted temporary layoffs “in accordance with the requirements of” the ESA, the parties agreed to be governed by the provisions applicable to temporary layoffs, not terminations.

Substance Over Form 

The Court also rejected the argument that the location of the layoff clause under the “Termination” heading of the contract made it a termination clause. The Court emphasized that an employment agreement must be interpreted as a whole, rather than on a piecemeal basis, and that headings are not determinative of a clause’s true nature. In approving the lower court’s reasoning, the Court of Appeal highlighted a fundamental principle of contractual interpretation: “it is the substance that matters, not the form”.

Contractual Freedom Preserved 

Finally, the Court of Appeal emphasized that courts “should not dispense lightly with contractual freedom”. While courts have been quick to void termination clauses that breach the ESA, they should not be eager to extend this strict approach to temporary layoff clauses that do not function as termination clauses and are legally compliant.

Key Takeaways

There are several important takeaways from this decision for both employers and employees.

For employers, this decision confirms that a temporary layoff clause is a distinct contractual mechanism from a termination clause. As a result, if your layoff clause is compliant and restricts layoffs to the limits defined in the ESA, its validity will not be threatened by an invalid termination clause elsewhere in the agreement. However, because a unilateral layoff without a contract constitutes constructive dismissal at common law, employers must still ensure their agreements contain a properly drafted temporary layoff clause to have the right to implement a layoff in the first place. Employers must remain vigilant; if a layoff clause fails to restrict layoffs to those permitted under the ESA, or if the actual layoff exceeds the strict statutory limits, the employer may still face a constructive dismissal claim and expose themselves to liability.

For employees, this decision clarifies that a compliant temporary layoff provision in a signed employment agreement can validly permit your employer to temporarily pause your work. However, you should not assume that a layoff is automatically lawful. If your employer places you on a layoff without a clear contractual clause permitting them to do so, or if they fail to recall you within the strict timelines set out in the ESA, you may be entitled to damages.

Navigating the enforceability of contract clauses requires a detailed, case-by-case analysis. Whether you are an employer looking to draft compliant agreements or an employee seeking to understand how an agreement impacts their rights, we can help. Contact us today to ensure your rights and interests are effectively protected.

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Endnotes

  1. Waksdale v. Swegon North America Inc., 2020 ONCA 391 (CanLII), <https://canlii.ca/t/j89s5>
  2. Taylor v. Salytics Inc., 2026 ONCA 621 (CanLII), <https://canlii.ca/t/kn19t>

The post Case Law Update: Substance Over Form – Temporary Layoff Clauses are Not Termination Clauses appeared first on Rudner Law – Employment Lawyers.