Ontario Employment Standards Could Invalidate Broad Arbitration Clauses

By June 5, 2024 No Comments

In a 2023 decision that could have consequences beyond the immediate dispute, the Ontario Superior Court of Justice held that an arbitration clause (the “Arbitration Agreement”) in a contract of employment which attempted to contract out of minimum standards in the Employment Standards Act, 2001, SO 2000, c. 41 (the “ESA”) is invalid.

Key Facts

In Nohdomi v. Callidus Capital Corporation, 2023 ONSC 4469 (“Nohdomi”), the defendants, Callidus Capital Corporation (“Callidus”) and Catalyst Capital Group Inc. (“Catalyst”), brought a motion to stay the action pursuant to section 7 of Ontario’s Arbitration Act, 1991, SO 1991, c 17. Justice Merrit dismissed the defendant’s motion, holding that the Arbitration Agreement in the written contract of employment between Callidus and the plaintiff was invalid because the arbitration provision prevented the employee from, minimally, making a complaint to the Ministry of Labour.

Following termination of the plaintiff’s employment, the plaintiff commenced a wrongful dismissal action against the defendants alleging that Callidus and Catalyst were common employers.

The plaintiff had a written employment agreement with Callidus containing the Arbitration Agreement. The Arbitration Agreement provided that claims arising from the employment relationship be determined by arbitration “in accordance with the Rules for the Conduct of Arbitrations of the Arbitrators’ Institute of Canada“. Consistent with the competence-competence principle, the Arbitration Agreement expressly provided that the arbitrator would determine jurisdictional questions.

In response to the defendants’ stay motion, the plaintiff took the position that the Arbitration Agreement was invalid because it violated the ESA. The plaintiff argued that the Arbitration Agreement limited his right to make a complaint under the ESA and that the Arbitration Agreement was part of an employment agreement containing a termination provision that violated the ESA.

Arbitration Agreement Invalid

Justice Merritt dismissed the defendants’ stay motion, holding that the Arbitration Agreement purported to contract out of rights to have an Employment Standards Office investigate a complaint under s. 96(1) of the ESA, a contravention sections 5 of the ESA.

The Court found that it was irrelevant to the analysis that the plaintiff had not filed a complaint under the ESA.

Of note, the Court specifically considered and rejected the employer’s argument that the Arbitration Agreement was not “an inferior procedural dispute resolution method”. Compared to the option of having the Ministry of Labour bear the burden of investigating a complaint at no cost, Justice Merritt found that the Arbitration Agreement’s $7,500 cost to commence arbitration did not provide a greater benefit than the ESA.

Having decided that the Arbitration Agreement was invalid, Justice Merritt did not find it necessary to determine whether the employment agreement’s termination provision was similarly invalid.

No Contracting Out of Any Employment Standards

Since the Supreme Court of Canada’s 1992 Machtinger v. HOJ Industries Ltd., [1992] 1 SCR. 986, decision, it has become conventional wisdom that the ESA’s “no contracting out” provision primarily applies to invalidation of termination provisions in employment contracts.

Nohdomi provides a timely reminder to Ontario employers that section 5 of the ESA applies to all “employment standards” under the ESA.

In an attempt to avoid parallel processes, it is common for arbitration clauses to be drafted with broad language capturing disputes “arising from” or “relating to” all matters.

In the employment context, where “agreements are interpreted differently than other contracts”, the Nohdomi decision leaves open the prospect that any broadly drafted arbitration provision may be found to violate the ESA. Ontario employers should carefully review arbitration provisions in existing contracts to ensure they preserve an employee’s right to make an ESA complaint.

As is regularly noted in the arbitration bar, arbitration is a contractually agreed alternative to court litigation. There are certainly cases where both employer and employee may both wish to arbitrate.

If, however, an employee is not satisfied that the potentially increased speed, procedural customization and (if agreed) confidentiality of arbitration is preferable to court, Ontario employers will now have to think hard before seeking to enforce pre-dispute arbitration provisions.

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