Employer Alert: Ontario Court of Appeal Makes Major Change to Termination Clause Interpretation

A recent decision from the Court of Appeal for Ontario has the potential to render many existing contractual termination clauses unenforceable. This development will have a major impact on employee severance rights and the costs employers may be required to incur when dismissing workers.

Background

In Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Ontario Court of Appeal was asked to review a situation where an employee had been fired on a without cause basis and was seeking additional severance. The employee, Waksdale, argued that as part of the termination clause in his employment contract (specifically, the cause termination portion) violated the minimum requirements of the Employment Standards Act, 2000 (the “ESA”), the entire termination provision should be considered void at law for illegality.

This was a somewhat novel argument. Historically, lower courts in Ontario have accepted the idea that unless illegality was part of the provision the employer was relying on as the ground of dismissal, such contractual flaws would have no functional impact on an employee’s termination entitlements.

An example of this approach can be seen in Khashaba v. Procom Consultants Group Ltd., 2018 ONSC 7617 (a case we have previously covered in some detail). In Khashaba, the Court accepted that when illegality was limited to one part of a termination provision, only that portion would be unenforceable. In the words of Justice Brown:

I interpret the references in the case law to a single violation of the ESA rendering an “entire termination clause” void to mean that the entire clause which contains the illegality should be void. No words or sentences in the clause containing the illegality should be valid or enforceable for any purpose. In this context, the entirety of the “Termination for Cause” clause should be void.

The other clauses of the “Early Termination” provision remain valid and enforceable. This result accords with the objectives of the ESA. The “Termination without Cause” provision does not violate the ESA. It also contains explicit language showing the parties’ intent that it should comply with the ESA. The other clauses in the “Early Termination” provision do not relate to the manner in which an employer can terminate an employee’s employment. There is no reason why they should not remain valid and enforceable. [emphasis added]

Court of Appeal Breaks New Ground

When confronted in Waksdale by an almost identical situation to that in Khashaba (i.e. a without cause termination, but arguments made over whether improper cause language should render the entire termination provision illegal), the Ontario Court of Appeal took a different tack.

The Court made the following statement, effectively refuting the prior line of authority as represented by Khashaba:

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 Termination 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. [emphasis added]

As a result of its decision, the Court of Appeal ordered that Waksdale’s case be returned to a lower court for an assessment of his common law (rather than contractual) right to severance.

Takeaway for Ontario employers and employees

Most employers have focused their efforts on getting without cause termination language right. They have not, however, necessarily invested the same effort in ensuring that the cause termination language in their employment contracts is equally enforceable (in that it complies in all circumstances with minimum statutory requirements).

The classic example is a termination clause that asserts an employee can be fired without pay or notice for any reason that would amount to “just cause at common law”. As earlier decisions like Khashaba have established, this type of boilerplate language is illegal as it improperly conflates common law and statutory standards. While historically such an error may not have been fatal for employers when dismissing workers without cause, in light of Waksdale, improperly drafted cause dismissal language can render void the entirety of an otherwise valid termination provision.

The difference between an enforceable and unenforceable termination clause can be substantive. In extreme cases, this can change the value of severance from just 8 weeks to 2 years of total compensation. To learn more about the different regimes that govern severance entitlements, read our summary.

Going forward, Ontario employers are strongly advised to have their existing employment contracts reviewed by an experienced employment lawyer to assess their enforceability. Likewise, workers who are dismissed should not assume that their existing employment agreement will automatically limit severance rights. Waksdale is a game-changer; employers and workers alike should take note.

Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in Ottawa and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.