Ontario Court of Appeal Decision Leaves Employers with Potentially Unenforceable Termination Clauses
A recent Ontario Court of Appeal decision illustrates the importance of carefully scrutinizing all provisions in an employment agreement to ensure that they comply with the Employment Standards Act, 2000 (the ESA) as a whole.
In Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Ontario Court of Appeal held that if any termination provision in an employment agreement – even one that is not relied upon for termination – breaches the ESA, the termination provisions in their entirety will be deemed void and replaced by a more generous common law notice obligation, regardless of whether the agreement includes a severability provision.
As a result, many employers across Ontario will now no longer be able to rely on the enforceability of the termination clauses in their employment agreements that limit employees’ termination entitlements. This decision has the potential to materially increase many employers’ severance cost obligations, because termination provisions that are unenforceable and void will mean employers owe their employees common law reasonable notice instead of the ESA minimums.
In Waksdale v Swegon North America Inc., 2020, Mr. Benjamin Waksdale brought a wrongful dismissal action against his former employer, Swegon North America Inc. after being terminated without cause.
Mr. Waksdale’s employment contract included a “Termination For Cause” provision, as well as a separate “Termination Without Cause” provision. The parties agreed that the wording of the Termination for Cause provision violated the terms of the ESA, and was therefore void and unenforceable. The issue in Waksdale was whether the unlawful Termination For Cause provision also rendered the Termination Without Cause provision unenforceable, entitling Mr. Waksdale to a period of common law reasonable notice.
At the Superior Court of Justice level, the motions judge dismissed Mr. Waksdale’s action on summary judgment, holding that the Termination Without Cause provision was a “stand-alone clause, and is enforceable without reference to the Termination with Cause clause.”
The Court of Appeal Decision
The Court of Appeal disagreed with the motions judge, and held that “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.”
Overall, the “Termination Without Cause” provision and the “Termination for Cause” provision had to be interpreted together and holistically, notwithstanding that the plaintiff was terminated “without cause” and the applicable provision was compliant with the ESA. Despite the employer not relying on the “for cause” provision when terminating the plaintiff, the Court of Appeal held that an otherwise enforceable “Termination Without Cause” provision in an employment agreement is rendered unenforceable because the separate “Termination for Cause” provision in the same employment agreement breached the ESA.
The Court also rejected the application of a “severability” clause that would have otherwise separated the “for cause” and “without cause” provisions, stating 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.”
While it is not explained in the decision, these provisions are now illegal because they eliminate the employee’s right to their ESA entitlements in for cause terminations where the employee’s misconduct meets the common law threshold for just cause, but not the higher ESA threshold, which requires willfulness.
The Court’s decision in Waksdale is an important judiciary development that recognizes the inherent power imbalance between employees and employers, as well as the remedial protections offered by the ESA.
The decision will have a significant and wide-reaching impact on employers attempting to limit an employee’s common law entitlements on termination. Overall, “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.” Ontario employers face serious liability if they, in restricting an employee’s common law rights on termination, violate that employee’s ESA rights.
Employers will need to review and update their employment agreements to ensure their termination provisions do not breach the ESA, either individually or holistically. Compliance with the new Waksdale enforceability guidelines may result in substantial dividends at termination, as the difference in an employer’s liability for an employee with an enforceable termination provision versus one without can be significant.