When Probationary Employment Clauses Backfire: Important Lessons from Chan v. NYX Capital Corp.

Dan Wilband

The Ontario Superior Court of Justice recently delivered an important decision in Chan v. NYX Capital Corp. that highlights the critical importance of properly drafted employment agreements. This case demonstrates why having an experienced employment lawyer assist with contract drafting is a worthwhile investment for employers.

The employer in this case used a contract that attempted to create a probationary period, which is a common and sensible approach for managing new hires. However, all contract clauses must be carefully crafted to comply with employment standards legislation and evolving case law. While the underlying concept is straightforward, there are important technical requirements that can easily be overlooked without specialized legal knowledge.

The Facts

The employee was hired by a small real estate investment firm in October 2021 as Vice President of Acquisitions and Asset Management and Chief Compliance Officer. His employment agreement included what appeared to be a standard three-month probationary period, during which the employer could terminate him “at any time and for any reason” without notice or pay.

Just one day before his probationary period expired in January 2022, the employer terminated the employee’s employment. The company believed it could dismiss him without any obligations, relying on the probationary clause in their agreement. The employee sued for wrongful dismissal, arguing that the termination provisions were unenforceable and that he was entitled to reasonable notice.

The Legal Issues

The case centered on two key questions. First, was the probationary employment clause valid and enforceable? Second, if not, what notice period was the employee entitled to receive?

Justice Parghi found that the entire termination provision in the employee’s employment agreement violated the Employment Standards Act (ESA) and was therefore void and unenforceable. The court identified four specific ways the agreement contravened employment standards:

(1) The probationary clause purported to give the employer absolute discretion to terminate “for any reason,” which conflicts with ESA protections against reprisal dismissals. (2) Similarly, the post-probationary termination clause contained the same problematic “any time without cause” language. (3) By limiting him to certain minimum entitlements under the ESA, the agreement also attempted to release the company from claims that cannot legally be waived or contracted out of, such as reprisal claims under the ESA. (4) Finally, the “at any time for cause” termination clause was broader than the narrow circumstances permitted under Ontario’s employment standards legislation.

Applying the principle from Waksdale v. Swegon North America Inc., Justice Parghi ruled that when any part of a termination provision violates the ESA, the entire termination clause becomes void and unenforceable—regardless of whether the employer actually complied with minimum standards when dismissing the employee.

The Probationary Employee Question

With the probationary clause struck down, the court addressed whether the employee should still be treated as a probationary employee based on the parties’ apparent intentions. The employer argued that both parties understood there was a probationary period, so the common law test for dismissing probationary employees should apply.

Justice Parghi firmly rejected this argument. Relying on Machtinger v. HOJ Industries Ltd., the court emphasized that when an employment term violates the ESA and becomes void, the common law presumption of reasonable notice prevails. The court cannot look to the invalid clause to determine the parties’ intentions, as “if a term is null and void, then it is null and void for all purposes.”

The decision reinforced that this approach serves important policy objectives by incentivizing employers to draft ESA-compliant agreements rather than trying to contract around their obligations.

The Reasonable Notice Period

Having established that the employee was entitled to reasonable notice, the court applied the traditional Bardal factors to determine the appropriate period. Despite the employee’s short three-month tenure, Justice Parghi awarded three months’ notice, effectively doubling his actual service period.

The court characterized the employee’s position as mid-level management rather than senior executive level, noting his relatively small number of direct reports and exclusion from the company’s leadership team. However, the court recognized that employees with very short service periods face unique challenges in the job market, as they must explain to prospective employers why they were dismissed so quickly. This factor supported a longer notice period relative to the employee’s brief tenure.

The court awarded the employee $44,644.46 in damages, representing three months of base salary, benefits, and reimbursement for qualifying exam fees that the employer had agreed to cover.

Key Takeaways for Employers

This decision underscores several critical lessons for employers drafting employment agreements. Most importantly, probationary clauses must comply with employment standards legislation. Employers cannot grant themselves absolute discretion to terminate “for any reason” during probationary periods, as this language violates ESA protections.

All termination provisions must be carefully drafted to avoid exceeding the scope of what employment standards permit. Using broad language like “at any time without cause” or defining “cause” more expansively than employment standards allow will void the entire termination clause.

The Waksdale principle means that a single problematic provision can invalidate an entire termination clause, leaving employers exposed to potentially lengthy common law notice periods. This makes careful drafting essential rather than optional.

Finally, this case demonstrates that even employees with very short service periods can receive substantial notice awards when employers fail to properly limit their common law obligations through valid contractual terms.

For employers, the message is clear: investing in proper legal drafting of employment agreements is essential protection against unexpectedly large termination costs. For employees, this decision reinforces that invalid contractual terms cannot be used to deny them their entitlements, even during probationary periods.

The Chan decision serves as a valuable reminder that in employment law, the details matter enormously, and attempting to minimize obligations through legally questionable shortcuts often proves to be a costly mistake.