Ontario Superior Court Provides Guidance on the Interpretation of Arbitration Clauses in Employment Agreements

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In Nohdomi v. Callidus Capital Corp., 2023 ONSC 4469, the Ontario Superior Court of Justice confirmed that an arbitration clause is invalid and unenforceable if it contracts out of the Employment Standards Act, 2000, S.O. 2000, c. 41 (“ESA”).

In this matter, the plaintiff employee, Daizo Nohdomi (“Nohdomi”), and his employer, Catalyst Capital Group Inc. (“Catalyst”), entered into an employment agreement. The employment agreement contained an arbitration clause which provided that any controversy or claim arising out of or relating to the employment agreement would be settled by arbitration. The arbitration clause further stipulated that an arbitrator would have the right to determine all questions of law and jurisdiction. In addition, the clause provided an arbitrator with the right to grant interim and/or final damages awards.

When the employment relationship ended, Nohdomi brought a wrongful termination action against Catalyst and co-defendant Callidus Capital Corp. As a response, the defendants brought a motion for an order to stay or dismiss the plaintiff’s action. The defendants claimed that the matter was required to be settled by arbitration, pursuant to the employment agreement between the parties.

The plaintiff’s position was that the arbitration clause was invalid as it violated the ESA in two respects. First, the arbitration clause limited Nohdomi’s right to make a complaint under the ESA, and second, it was part of a termination provision that also violated the ESA.

The Court agreed with the plaintiff, concluding that the arbitration clause amounted to an illegal contracting out of an employment standard.

The Court explained that under section 1(1) of the ESA, an employment standard is defined as follows:

“[E]mployment standard” means a requirement or prohibition under this Act that applies to an employer for the benefit of an employee.

The Court also pointed to section 96(1) of the ESA, which provides an employee with the right to make a complaint to the Ministry of Labour. Section 96(1) reads as follows:

A person alleging that this Act has been or is being contravened may file a complaint with the Ministry in a written or electronic form approved by the Director.

The Court further clarified that the investigation process triggered by section 96(1) institutes an employment standard.

The Court clarified that one of the benefits of the ESA was an employee’s right to make a complaint to the Ministry of Labour should their employer contravene the ESA. The statute further provides the employee with the right to have the Ministry investigate a complaint. A right which the Court additionally confirmed was also an “employment standard”.

Although Nohdomi took no steps to file a complaint under the ESA, the Court determined it had no bearing on the matter because a clause that deprives an employee of an ESA standard is enough to render an agreement invalid. As such, the arbitration clause found in Nohdomi’s employment agreement constituted a contracting out of the ESA, as it deprived Nohdomi of the right to make a complaint with the Ministry under the ESA.

In addition, the Court weighed whether an invalid termination clause would also invalidate other provisions of the employment agreement such as an arbitration clause. On this issue, the Court declined to answer, stating the following at paragraph 31:

“Given that I have found that the Arbitration Agreement is invalid because it violates the ESA with respect to the filing of a complaint, it is not necessary for me to decide if the termination provision is invalid and whether the Arbitration Agreement is part of the termination provision. The issue of the validity of the termination provision is best left for another day.”

Employers must ensure that, when drafting employment agreements, they do not include any provisions that would potentially fall below the minimum standards set out in the ESA. Should a Court determine that a clause is less than what the ESA prescribes, employers may run the risk of being exposed to costly liability.