Global companies expanding into Ontario or establishing a Canadian presence may assume that once an employee signs an employment agreement, it’s legally binding on the parties.
This assumption is, however, false.
Regardless of where a business is headquartered, if there are Ontario-based employees, employment contracts must be Ontario-compliant.
For Israeli startups in particular, using parent-company templates or standard agreements drafted under Israeli or American norms can unintentionally violate Ontario statutory protections, and expose the company to costly claims.
Here’s what companies operating in Ontario need to know:
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Ontario employment law applies based on where the work is performed
Companies with Ontario-based employees cannot contract out of Ontario’s minimum statutory entitlements per the Employment Standards Act (the “ESA”). This includes rules around termination notice, vacation pay, public holidays, overtime, among other employer restrictions and employee entitlements.
Some international employment agreements attempt to specify that another country’s law governs the contract (i.e., a clause stipulating “This Agreement shall be governed by and construed in accordance with the laws of the State of New York.”). Ontario courts will, however, still apply the ESA if the employee’s work is performed in Ontario.
This includes situations where:
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The employer company is incorporated outside of Ontario (or Canada);
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Payroll is processed abroad; and/or
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The employment contract was drafted or signed elsewhere.
Where employees split time between Ontario and somewhere in America, for example, or Tel Aviv, it is important to note that Ontario courts will prioritize where the work is actually performed over the language of the contract.
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Termination clauses carry particular risk
Pursuant to the ESA, Ontario employees are entitled to certain minimum periods of notice – the time period before which the employment relationship will formally end, once the employer has informed the employee it will be ending.
If the employee has been continuously employed by the employer for three (3) months or more, in general the employer is required to provide the employee written notice of their termination, termination pay, or a combination of the two of them (as long as the total of the notice period and the weeks of termination pay equals the full notice period the employee is entitled to receive). The required notice increases with the employee’s length of service, up to a statutory maximum of eight (8) weeks.
A termination clause is a provision in an employment agreement that sets out what the employee will receive if their employment is terminated without cause; clarifying (and ideally limiting) the employee’s entitlements upon termination. It is, in effect, a risk management tool.
Ontario courts will generally invalidate a termination clause, however, if:
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It violates the ESA minimums, even potentially;
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It attempts to contract out of other statutory entitlements;
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It contains ambiguous or inconsistent wording; and/or
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It fails to address the continuation of certain employee benefits upon termination.
If voided, the entire clause will be treated as though it did not exist, and the common law entitlements, which are significantly higher than those of the ESA minimums, will become the default.
For multinational organizations, the financial implications of this switch could be substantial. A senior employee with several years of service may be entitled to 12, 18, or even 24 months of compensation at common law; far exceeding ESA minimums.
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Non-compete clauses are sensitive
While non-compete clauses are standard in many jurisdictions, Ontario generally prohibits them (subject to certain narrow exceptions provided for in the ESA). A foreign parent company accustomed to stronger post-employment restrictions may assume its standard template is enforceable in Ontario, but courts here are highly critical of such clauses.
A carefully drafted non-solicitation clause may provide more realistic protection for global companies with employees in Ontario.
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“Consideration” matters
The fundamental contract law principle of “consideration” refers to something of value exchanged between the parties. It is a key requirement for the contract to be valid.
For new employees, the offer of employment is itself valid consideration for the terms of the employment agreement. However, for existing employees, continued employment alone is generally not sufficient consideration in Ontario. The employee must receive something new and tangible in exchange for signing, such as:
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A signing bonus;
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A salary increase;
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A promotion;
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Additional vacation; or
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A one-time lump sum payment
Global companies “rolling out” updated global templates to existing employees should take note. This practice could default employee entitlements to the common law regime.
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Conclusion
