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Ontario Court of Appeal Casts Doubt on Enforceability of Majority of Termination Provisions

Fasken
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Labour, Employment & Human Rights Bulletin

In a rather startling, short, but extremely significant and important decision, Ontario's Court of Appeal dealt with the validity of a two part termination provision in an employment agreement. The first part dealt with termination for cause while the second part dealt with termination with notice. Each part had its own separate clause in the agreement. The court found that both parts had to be read as a whole and that since the termination for cause clause violated the Employment Standards Act, 2000 ("ESA"), all clauses of the termination provision, including the termination with notice clause, were void and unenforceable. Further, the Court ruled that the severability clause in the agreement could not operate to sever off the offending portion of the termination provision - instead, both parts of the termination provision had to be read as a whole and severability clauses cannot have any effect on clauses of a contact that had been made void by statute.

The case is Waksdale vs. Swegon North America Inc.

Facts

The Plaintiff was a Director of Sales for a company that produced and distributed energy efficient ventilation and indoor climate systems. He entered into an employment agreement on December 20, 2017, commenced employment on January 8, 2018 and was terminated without cause on October 18, 2018. He was provided with two weeks' pay on termination in accordance with the terms of his employment agreement. The Company did not allege cause.

The employment agreement contained two clauses dealing with termination of employment. The first clause dealt with termination for cause. It was a lengthy very comprehensive provision which listed out nine grounds, including the ninth, being "any matter recognized by the Courts to justify termination for cause." Importantly, the termination for cause clause did not recognize the higher standard of wilfulness required for a termination for cause under the ESA.

The second clause dealt with termination with notice and it provided, in part, as follows:

"You agree that, in the event that your employment is terminated without cause, you shall receive one week notice or pay in lieu of such notice in addition to the minimum notice or pay in lieu of such notice and statutory severance pay as may be required under the Employment Standards Act, 2000 as amended…"

Lower Court Decision

Following his termination, the Plaintiff sued for wrongful dismissal. He claimed that he was entitled to six months' pay in lieu of notice for his eight months of employment.

A motion for Summary Judgment was brought in the Ontario Superior Court of Justice. The Plaintiff sought payment of six months' pay while the Defendant asked that the action be dismissed.

Even though his employment had not been terminated for cause, the Plaintiff argued that the termination for cause clause violated the ESA and was therefore void and unenforceable. He further argued that the defective clause rendered the entire agreement void and unenforceable, or at the very least, it rendered both termination clauses in the agreement void and unenforceable.

The Company conceded that the termination for cause clause violated the ESA and was therefore unenforceable. However, it said that this was irrelevant in the case for wrongful dismissal because the Plaintiff was not terminated for cause and the defective clause did not touch on the termination with notice clause.

The Motion Judge agreed with the Company, and dismissed the action. 

  • He concluded that the termination with notice clause was "unambiguous, enforceable and stands apart from the termination for cause clause". 
  • He further found that it was only the termination with notice clause which applied in the case at hand and there were no grounds on which to challenge the enforceability of that clause. 
  • He went on to state "it does not contravene the ESA and is therefore valid and enforceable as written and agreed to". 

Court of Appeal Decision

The Plaintiff appealed the decision of the Motion Judge to the Court of Appeal and in a unanimous decision released on June 17, 2020, a panel of three Appellate Judges overturned the decision. The panel ruled that the termination provisions of the agreement were void and unenforceable and they remitted the matter back to the Motion Judge to determine the quantum of the Plaintiff's damages which would now be determined in accordance with common law.

The Court of Appeal decided that the Motion Judge erred in his interpretation of the employment agreement. It said that the termination provisions in the agreement had to be read as a whole and not piecemeal, without regard to their combined effect, which is what it said the Motion Judge had erroneously done. The correct analytical approach, said the Court "is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA".

The court went on to say that "it is irrelevant whether the termination provisions are found in one place in the agreement or separated or whether the provisions are, by their terms, otherwise linked".

Finally, the Court of Appeal dismissed the Company's argument that the severability clause in the agreement should be applied to sever off the termination for cause provision and leave the termination with notice provision intact. In this regard the court said "a severability clause cannot have any effect on clauses of a contract that have been made void by statute… Having concluded that the termination for cause provision and the termination of employment with notice provision are to be understood together, the severability clause cannot apply to sever the offending portion of the termination provisions".

Impact of Court of Appeal Decision

This decision is going to have an enormous impact on the enforceability of employment agreements. Most employment agreements contain clauses dealing with termination for cause as well as termination with notice. 

In the past, the vast majority of the enforceability cases involved the termination with notice provision. If that provision was found to have violated the ESA then it was void and unenforceable and the common law standard of "reasonable notice" then became applicable.

Now, as a result of the Court of Appeal's decision, termination for cause clauses are going to be carefully scrutinized in every case. The test, according to the Court of Appeal is "to determine whether the termination provisions in an employment agreement read as a whole violate the ESA".

In Ontario, the issue of whether a termination for cause clause violates the ESA is determined by examining whether the particular clause offends what is provided for in Ontario Regulation 288/01. That Regulation sets out the situations or circumstances involving an employee where no notice of termination is required.

The relevant section of that Regulation is Section 2(1) 3 which states that notice of termination is not required in the case of "an employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer".

If a provision in an employment contract provided that an employee could be terminated for a particular reason that doesn't come squarely within the words of Section 2(1) 3 of Regulation 288/01, then that provision could be found to violate the ESA.  If that were the case, not only would the termination for cause provision be void and unenforceable but so also, following Waksdale, would the termination with notice provision.

Take the following example. One of the grounds listed in a termination for cause provision in an employment agreement reads:  "failure to immediately inform management of receipt of gifts or favors valued at greater than $100.00 annually". (This was in the Waksdale agreement)

If an employee received a $101.00 gift certificate from a client but failed to report it to management or he reported it late, this employee would, on the strict wording of the clause, be in violation of the clause because he failed to report the gift "immediately" and would therefore be subject to termination for cause with no notice or pay in lieu of notice. However, if this happened in Ontario, the employee would very likely argue that his actions would not fit within Section 2(1) 3 of Regulation 288/01 either because such actions were not wilful (he may have simply forgotten to make the report) or they were trivial.

If a court accepted the argument of the employee, then the particular clause in question in the termination for cause clause would violate the ESA and the net effect of this, following Waksdale, would be that all of the termination provisions in the employment agreement would be illegal including the termination with notice provision.

Unfortunately, this appears to be the effect of Waksdale.

This result does not seem entirely fair. An employee and an employer may have negotiated an employment agreement that provides very generous wages and benefits and other perquisites for the employee where the quid pro quo was a notice period that was more generous than the ESA but not as generous as what an employee might receive at common law. If the parties happen to put a provision in their termination with cause clause that violated the ESA, it doesn't seem fair that the notice period that the parties had negotiated becomes void and an employee can now claim common law notice if terminated for reasons other than cause while he has already reaped the benefit of the very generous wages, benefits and other perquisites that the same employment agreement provided. 

We don't know yet if the Court of Appeal's decision is going to be appealed to the Supreme Court of Canada and if so, whether the Supreme Court will agree to hear it.

In the interim, employers need to look at their employment agreements to see whether there are potential enforceability issues involving the termination provisions in light of the Waksdale decision. If you have any doubt, please ask us. If there are enforceability issues, a risk analysis should be done and one of the options for dealing with a significant risk situation would be to negotiate a revised agreement. It must be recognized however that some form of additional consideration may have to be given by the employer if a new agreement is to be entered into.

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