Wrongful dismissal is one of the most significant legal risks a Canadian small business faces and one of the most preventable. Understanding what it is, how courts have applied it, and what you can do now to reduce your exposure is essential before you are ever in a position of needing to use that knowledge under pressure.
What wrongful dismissal means in Canada
Wrongful dismissal in Canada occurs when an employer terminates an employee without providing sufficient notice or pay in lieu, or terminates for a discriminatory reason. It does not mean the employer lacked a reason for terminating; it means the manner or the amount of notice was legally insufficient.
Canada operates on the implied contract of reasonable notice. Unless a valid written termination clause caps the obligation, courts imply that an employee is entitled to reasonable notice based on the Bardal factors (established by the Ontario Court of Appeal in Bardal v Globe and Mail): character of employment, length of service, age of the employee, and availability of similar employment given the employee's qualifications.
A separately named but equally important risk is discriminatory dismissal: terminating an employee because of a ground protected under the Ontario Human Rights Code (race, sex, age, disability, pregnancy, religion, sexual orientation, among others). This gives rise to a Human Rights Tribunal complaint rather than a civil wrongful dismissal claim, but both can run simultaneously.
Constructive dismissal: the change-of-terms trap
Constructive dismissal occurs when an employer makes a significant unilateral change to the terms of employment, effectively forcing the employee to choose between accepting the change or leaving. Courts treat a departure in this circumstance as a dismissal by the employer, not a resignation by the employee. The employee can sue for wrongful dismissal damages even though they technically quit.
Changes that have been found to constitute constructive dismissal in Canadian courts include: significant pay cuts (generally more than 10 to 15 percent without consent), demotion in role or reporting structure, geographic relocation without consent, fundamental changes to job duties, and creation of a hostile or intolerable work environment that the employer fails to address.
Small business owners who adjust compensation or duties during difficult periods without getting written consent from the employee are creating constructive dismissal exposure. If you need to make changes, get consent in writing and provide fresh consideration (a benefit, a raise when conditions improve, or continued employment for a defined term) to make the agreement legally binding. Silence from an employee after the change is not consent.
Common law notice vs ESA notice: the gap that surprises employers
Ontario's ESA caps statutory notice at eight weeks. Most small business owners assume this is the limit of their obligation. It is not. Under Canadian common law, courts have regularly awarded notice periods of one month per year of service for tenured employees, vastly exceeding the ESA maximum.
A practical illustration: an office manager who has been with your company for seven years, earns $65,000 per year, and is in their mid-forties in a specialized role may be entitled to seven to ten months of reasonable notice under common law. The ESA would require eight weeks (two months). The common law award could cost the business $38,000 to $54,000 in pay in lieu, compared to $10,000 under the ESA.
The only reliable way to limit this exposure to the ESA amount is a valid, clearly worded termination clause in the original signed employment contract. If the clause was not in the original offer letter, or if the contract was never signed, or if the employee's role changed materially since signing, the clause may be void and common law applies. For the full picture of termination costs, see our guide on why employee turnover costs Canadian SMBs more.
How to reduce your wrongful dismissal risk
Four practices that meaningfully reduce exposure:
- Valid termination clauses in every offer letter. Have an employment lawyer draft or review the clause. A clause that simply says "we will provide notice as required by law" is often interpreted to include common law notice. The clause must clearly and unambiguously limit the notice obligation to the ESA minimum to be effective.
- Progressive discipline documentation. For performance-based terminations, documented verbal warnings, written warnings, and a Performance Improvement Plan (PIP) build the evidentiary record for just cause and, if just cause is not provable, demonstrate that the termination was not arbitrary or discriminatory.
- No discriminatory grounds. Before terminating, verify that the reason for the decision cannot be linked to a protected ground. If a termination follows closely after a pregnancy announcement, a disability accommodation request, or a Human Rights complaint, timing alone can support an inference of discrimination.
- Written consent for material changes. Any change to compensation, title, duties, or location should be documented and signed by the employee. Do not rely on a verbal agreement for changes that affect the employment terms.
Ontario Labour Relations Board vs civil court
Employees have two main options for pursuing a wrongful dismissal claim in Ontario. The first is an ESA complaint filed with the Ontario Ministry of Labour, Training and Skills Development. This process is free for the employee, relatively fast, and is limited to ESA entitlements (maximum eight weeks notice pay, vacation pay, statutory severance where applicable). The Ministry can audit your payroll and order payment.
The second option is a civil court action for common law wrongful dismissal damages. This is where the large awards come from. Ontario's Small Claims Court handles wrongful dismissal claims up to $35,000. Above that threshold, Superior Court applies. Employees typically need a lawyer for Superior Court, which creates a cost-benefit calculation on both sides.
Working notice (allowing the employee to work through the notice period) reduces the employer's financial outlay but creates operational and cultural complications. Pay in lieu of notice (a lump sum on termination day) is cleaner but costs the same or more. Most Canadian SMBs in a without-cause termination choose pay in lieu. Document the election clearly in the termination letter.
Frequently asked questions
What is the difference between wrongful dismissal and unjust dismissal in Canada?
Wrongful dismissal is a common law cause of action available to all employees in Canada, claiming insufficient notice or discriminatory termination. Unjust dismissal is a separate remedy available only to federally regulated employees (banks, airlines, telecommunications, interprovincial transport) under the Canada Labour Code, which provides reinstatement as a possible remedy. Provincially regulated employees in Ontario pursue wrongful dismissal through civil court or ESA complaints, not unjust dismissal.
Can I be sued for wrongful dismissal even if I paid the ESA minimum?
Yes. The ESA minimum is the floor, not the ceiling. Paying the ESA minimum notice satisfies your statutory obligation, but it does not satisfy common law reasonable notice if the employee does not have a valid limiting termination clause in their contract. The employee can accept the ESA payment and still file a civil court claim for the additional amount they argue is owed under common law.
What is the statute of limitations for wrongful dismissal in Ontario?
An employee has two years from the date of termination to file a wrongful dismissal claim in Ontario civil court under the Limitations Act. For an ESA complaint, the period is two years from when the right to make the complaint arose. Employees who believe they were constructively dismissed have two years from when they became aware that a constructive dismissal occurred, which may be the date they resigned.
Does a termination clause always hold up in court in Ontario?
No. Courts have voided termination clauses in Ontario for several reasons: the clause was added after the employee started without fresh consideration; the language was ambiguous; the clause attempted to contract below the ESA minimum (which is void by statute); or the employee's role changed materially after the clause was signed, making it inapplicable to the current employment relationship. Have termination clauses reviewed by an employment lawyer and update them if the employee is promoted or their role changes significantly.
What is aggravated damages and when can it be awarded in wrongful dismissal?
Aggravated damages in wrongful dismissal are awarded when the employer's conduct in the dismissal was particularly harsh, humiliating, or in bad faith. Examples that have supported aggravated damages in Canadian cases: terminating by text message, making false allegations of cause, conducting an inadequate investigation before terminating, or publicly humiliating the employee. These awards are on top of notice damages and can be substantial. Conducting a respectful, private, in-person termination is not just good practice; it reduces aggravated damage exposure.