Ontario Court of Appeal Makes It Harder for Employers to Rely on Termination Clauses to Limit Liability

By Rich Appiah on July 2, 2020

Employers routinely include “Termination without Cause” provisions in their employment contracts to limit their employee dismissal obligations. In a decision released on June 17, 2020, Ontario’s highest court found such a provision to be unenforceable because a separate clause, relating to “Termination for Cause”, breached the Employment Standards Act, 2000 (the “ESA”). The decision may have costly implications for employers and should not be ignored.

Legal Background

“Termination without Cause” provisions of employment contracts are useful in minimizing employers’ termination obligations. The provisions typically specify that the employer may dismiss an employee by satisfying the employee’s termination rights under the ESA (or some other greater right). Importantly, the provisions also usually state that once the employer has satisfied these rights, then the employee will not be entitled to reasonable notice of termination at common law. Common law notice almost always imposes a greater burden upon employers than the ESA does.

As a basic principle, “Termination without Cause” provisions must comply with the ESA. If they appear to deny or withhold any component of an employee’s termination rights under the ESA, then the provisions will not be enforced by the courts. When this problem arises, a dismissed employee may claim compensation in lieu of common law notice, and the pay-out can be significant.

A “Termination for Cause” provision of an employment contract commonly lists the reasons why an employee may be dimissed without notice or compensation in lieu of notice for “just cause”. Importantly, some such reasons may not be sufficient to deny employees their entitlements under the ESA, even though the reasons might be sufficient to deny employees their common law entitlements. Lawyers acting for employees have argued that if the listed reasons are too broad, then the “Termination for Cause” provision may infringe employees’ rights under the ESA, and the provision is not enforceable.

The Case

The case of Waksdale v. Swegon North America Inc. involved a director of sales, Benjamin Waksdale, who started working for Swegon North America Inc. (“Swegon”) on January 8, 2018 as a director of sales. Swegon terminated his employment without cause on October 18, 2018 and paid him two weeks’ salary in lieu of notice of termination in accordance with the terms of his employment contract and the ESA. Mr. Waksdale, unhappy with the severance package offered to him, challenged his employment contract in court.

In the course of litigation, Mr. Waksdale acknowledged that the “Termination without Cause” provision of his employment contract complied with the minimum requirements of the ESA. At the same time, Swegon acknowledged that the “Termination for Cause” provision in his employment contract breached the ESA. On that basis, Mr. Waksdale argued that the illegality of the “Termination for Cause” provision rendered the “Termination without Cause” provision unenforceable. (Unfortunately, the decision does not state what was wrong with the “Termination for Cause” provision.)

Decision

The court ruled in Mr. Waksdale’s favour and held that the “Termination without Cause” provision was unenforceable despite the fact that the two termination provisions at issue were separate and applied to two different situations, and Mr. Waksdale was not dismissed for cause. In reaching its decision, the court ruled that termination provisions in employment agreements are to be interpreted as a whole and not on a clause-by-clause basis. If a “Termination for Cause” provision is not enforceable because it breaches the ESA, then the “Termination for Cause” provision will also be unenforceable, even if it complies with the ESA.

The court also declined to apply a “severability clause” found in Mr. Waksdale’s employment contract. This clause stated that an illegal term of the contract could simply be severed from the rest of the contract without impacting the rest of it. The court held that a severability clause cannot have any effect on clauses of a contract that are void by statute.

Key Take-Aways for Employers

Waksdale v. Swegon North America Inc. overturned precedent that has held that the validity of “Termination for Cause” and “Termination without Cause” provisions should be evaluated independently. For example, in a 2018 decision, a court held that a “Termination without Cause” provision that complied with the ESA was enforceable, even though a “Termination for Cause” provision was invalid because it allowed the employer to dismiss employees without notice for behaviour that would be permitted under the ESA. In that decision, the court read the two provisions independently.

In light of the Court of Appeal’s decision, it is possible that “Termination without Cause” provisions of employment contracts that were previously enforceable are now unenforceable. This can have costly reprecussions for employers parting ways with their employees. As a result, employers should take the following three steps to minimize their liability:

  1. direct their legal counsel to review their template employment contracts to address the concerns arising from the Court of Appeal’s recent decision;
  2. ensure that all new employees sign an updated template prior to their first day of work; and
  3. require existing employees to sign an updated template as a condition for promotions, discretionary bonuses, or salary or wage increases.

Please be in touch if you wish to discuss this case or its implications for your business.

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