Ontario, Canada: In Significant Decision, Court of Appeal Analyzes Employment Agreement as a Whole When Evaluating Enforceability of Termination Provisions

On June 17, 2020, in Waksdale v. Swegon North America Inc.,1 the Ontario Court of Appeal rendered a decision pertaining to the enforceability of termination provisions in employment contracts.  The court took the position that the proper method for determining whether a termination clause in an employment agreement is enforceable is to analyze the agreement as a whole rather than on a piecemeal basis. If any termination provision in the agreement is contrary to the requirements of the Employment Standards Act, 2000 (ESA), all termination provisions in the contract will be considered unenforceable, regardless of the existence of a severability clause, which cannot be utilized to sever the offending portion of the termination provisions.  This decision is highly significant for employers in Ontario and its significance may extend to employers throughout Canada. 

Background

The employee began his employment as Director of Sales at approximately $200,000 per year.  He was terminated without cause eight months later and paid two weeks’ pay in lieu of notice.  The employee sued for wrongful dismissal.  He argued that he had not been provided reasonable notice of dismissal, claimed six months’ pay in lieu of notice at common law, and moved for summary judgment.  The employer defended on the basis of a termination clause restricting the employee’s entitlement. 

The employee’s employment contract contained a “Termination for Cause” (“For Cause”) provision, which the employer conceded breached the ESA, and a “Termination of Employment with Notice” (“With Notice”) provision, which the employee acknowledged complied with the minimum requirements of the ESA.  The “With Notice” provision provided:

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. All reimbursement for business expenses shall cease as of the date of termination of your employment, however, you shall be reimbursed for legitimate business expenses that have been incurred and submitted to the Company but not as yet paid you to that date. The terms of this section shall continue to apply notwithstanding any changes hereafter to the terms of your employment, including, but not limited to, your job title, duties and responsibilities, reporting structure, responsibilities, compensation or benefits.

The employment contract also contained the following severability clause:

You agree that if any covenant, term, condition or provision of this letter outlining the offer of employment with the Company is found to be invalid, illegal or incapable of being enforced by a rule of law or public policy, all remaining covenants, terms conditions and provisions shall be considered severable and shall remain in full force and effect.

The employee argued that the defective “For Cause” provision rendered the entire employment agreement, or at least both of its termination provisions, void and unenforceable.  The employee’s position was based on prior precedent, where the Court of Appeal had provided the following guidance with respect to whether an illegal termination clause can be severed:

…first assess the termination clause to see whether there is any contracting out of an employment standard.  If there is, then the termination clause is void, and there is nothing to which the severability clause can be applied. 

The employer argued that it could rely on the “With Notice” provision because it was valid and because the employer was not alleging cause. 

Decision of the Superior Court of Justice – Ontario

In the court below,2 and as discussed in a prior article, the judge on the summary judgment motion concluded that the “With Notice” clause was a stand-alone, unambiguous, and enforceable clause.  He stated further that there was no need to sever anything because the “For Cause” provision did not apply in this case.  The court said:

…The [“With Notice” clause] is unambiguous, enforceable, and stands apart from the [“For Cause” clause]. Indeed, the [“For Cause” clause] itself specifically states that it applies only “[i]f the Company terminates your employment pursuant to this Section…”

There is no need to sever anything here as by its own terms the [“For Cause” provision] does not apply to the present case. It is only the [“With Notice” clause] which applies here, and there are no grounds on which to challenge the enforceability of that clause. It does not contravene the ESA, and is therefore valid and enforceable as written and agreed to. (paras. 16 and 17)

The court dismissed the employee’s motion and action. 

Decision of the Court of Appeal for Ontario

The Court of Appeal disagreed with the motion judge.  It concluded that the “With Notice” clause was unenforceable because it violated the ESA.  The court set aside the motion judge’s order, allowed the appeal, and ordered the matter remitted to the motion judge to determine the quantum of the employee’s damages.   

In arriving at this decision, the court relied on Justice Laskin’s summary of the law regarding the interpretation of termination clauses in employment contracts in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, and emphasized that the following points from this summary were “particularly apt” for purposes of the appeal:

  • Because the ESA is remedial legislation that is intended to protect the interests of employees, courts should favour an interpretation of the statute that encourages employers to comply with the statute’s minimum requirements and extends its protections to as many employees as possible. 
  • Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA.  The consequence for non-compliance should be more than an order to comply, as without a greater consequence employers would have little or no incentive to draft lawful termination clauses at the beginning of the employment relationship.
  • The enforceability of a termination clause must be determined at the time the employment agreement was executed, based on whether its wording contravenes the ESA.  If an employer complies with its obligations under the ESA on termination, its actions should not have the effect of saving a termination clause that violates the ESA.

Noting that there was no question that the employer would not be permitted to rely on the “With Notice” clause, the court framed the issue as follows:  Should the “For Cause” and the “With Notice” provisions be considered separately, or does the illegality of the “For Cause” provision impact the enforceability of the “With Notice” provision?

The court’s preference was to analyze the employment agreement as a whole and to refrain from enforcing termination provisions that are illegal in whole or in part, regardless of whether the illegal provision is relied upon.  The enforceability of termination provisions must be determined as at the time the agreement was executed.  A severability clause may not be utilized to sever the illegal portion:

An employment agreement must be interpreted as a whole and not on a piecemeal basis. The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA. Recognizing the power imbalance between employees and employers, as well as the remedial protections offered by the ESA, courts should focus on whether the employer has, in restricting an employee’s common law rights on termination, violated the employee’s ESA rights. While courts will permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal.  In conducting this analysis, 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. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach without regard to their combined effect.

Further, it is of no moment that the respondent ultimately did not rely on the [“For Cause” provision]. The court is obliged to determine the enforceability of the termination provisions as at the time the agreement was executed; non-reliance on the illegal provision is irrelevant.

Having concluded that the [“For Cause” provision] and the [“With Notice” provision] are to be understood together, the severability clause cannot apply to sever the offending portion of the termination provisions. (paras. 10, 11 and 14)

Bottom Line for Employers

Of interest to employer advocacy groups, the employer in the Waksdale case may pursue leave to appeal to the Supreme Court of Canada.  Absent a successful appeal, employers may face countless challenges to the enforceability of the termination provisions in employment contracts, a daunting reality for employers in a COVID-19 and post-COVID-19 world. 

The Court of Appeal decision in Waksdale has added a new and highly significant twist to the enforceability of termination clauses in employment agreements.  Employers that wish to rely on an ESA compliant “With Notice” provision may be prevented from doing so and required to pay the employee common law reasonable notice if any other termination provision in the agreement violates the ESA.  Accordingly, Waksdale puts employers on notice that they must take extreme care to ensure that every termination provision in their employment contracts complies with the minimum requirements of the ESA. 

To bolster the enforceability of termination clauses, employers should consider taking the following precautions if feasible:

  1. draft termination “With Notice” provisions utilizing language that states unequivocally that the parties intend to displace the employee’s common law reasonable notice rights;
  2. explicitly reference all minimum entitlements under the statute;
  3. ensure that any “For Cause” termination provision in Ontario (and as applicable in other provinces) is drafted to account for the difference between “just cause” at common law and the ESA standard (“willful misconduct” or “willful neglect of duty”); and
  4. state that if the termination clause falls now or in the future below the requirements of the ESA, it should be interpreted as being in compliance with those requirements.

Given this new reality, employers are encouraged to ask experienced employment counsel to conduct a review of their employment contracts to ensure that all of their termination provisions comply with the ESA.  Employers may also wish to rely on the drafting expertise of their legal advisors when setting out the terms of new employment relationships in new contracts.


See Footnotes

1 2020 ONCA 391

2 Waksdale v. Swegon North America Inc., 2019 ONSC 5705

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.