Be sure to check your contracts

by Nadia Zaman and Stuart Rudner

If you thought the termination clauses in your employment contracts were well-drafted and enforceable, think again. The unsettled field of employment law strikes again, as the Ontario Court of Appeal held that if a contract of employment contains a termination-with-cause provision that breaches the Employment Standards Act, 2000 (ESA), that will invalidate the termination-without-cause provision as well.

In Waksdale v. Swegon North America Inc., the Ontario Court of Appeal recently held that a termination-for-cause provision that violates the ESA voids the entire termination clause, including the termination-without-cause provision, even if the employer is only trying to rely on the latter and even if they are two separate and distinct provisions in the contract.

You may be thinking: That’s fine because we have the severability clause which will save the day. Unfortunately, although there was a severability clause in the agreement, the court held that it could not be used to save the termination clause.

The end result: If you dismiss an employee without cause, and provide notice or compensation in accordance with an appropriate termination-without-cause provision in a valid contract, but that contract includes a termination-for-cause provision that could breach the ESA, then you are out of luck. Even if you are not dismissing the employee for cause, the dismissal-for-cause clause must be considered.

And, unfortunately, the vast majority of termination-for-cause clauses out there do not comply with the ESA.

Background

The plaintiff, Benjamin Waksdale, was employed for eight months by Swegon North America before being dismissed without cause. He signed an employment contract that contained two distinct termination provisions: a “Termination of Employment with Notice” provision and a “Termination for Cause” provision, as well as a severability clause.

The employee brought a motion for summary judgment seeking six months of pay in lieu of notice. The employer conceded that the termination-for-cause provision violated the ESA and was unenforceable. However, the employer argued that it was irrelevant since the employer was not alleging cause; the “Termination of Employment with Notice” provision in the agreement was valid and could be relied upon.

The employee, stressing that the ESA was remedial legislation, argued that the invalid termination-for-cause provision “renders the entire agreement – or, at the very least, both termination provisions in the agreement – void and unenforceable.” This position was based on the Court of Appeal’s ruling in North v Metaswitch Networks Corporation, which provided the following guidance to determine 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 the cases relied on by the employee were distinguishable because in this case, there were two distinct termination provisions in the agreement: one for termination without cause and one for termination for cause. In doing so, the employer relied on Khashaba v Procom Consultants Group Ltd., where the court found that if one of the clauses in an employment agreement violates the ESA (like the termination for cause clause in Khashaba), that will not void the entire employment agreement, and the remainder of the agreement’s clauses, including the termination-without-cause provision, remain valid and enforceable.

The motion judge agreed with the employer and reasoned as follows:

“Here, as in Khashaba, the Termination of Employment with Notice clause does not require re-writing in any way. It is a stand-alone clause, and is enforceable without reference to the Termination with Cause clause. Nothing further needs to be done to ‘save’ the Termination of Employment with Notice clause, as it is enforceable on its own express terms.”

The employee appealed.

The Ontario Court of Appeal’s Decision

The Court of Appeal held that the motion judge erred in law in his interpretation of the employment contract and held that the termination provisions were unenforceable because they violated the ESA.

The court found that:

1. If a part of a termination clause in an employment contract is invalid, then the entire termination clause will be void, even if:

• the part that is being relied upon by the employer would be enforceable standing alone, and
• the termination provisions are distinct and separated in the employment agreement.

2. The two termination provisions are to be “understood together”. A severability clause (note that a severability clause usually states that invalid parts of the agreement can be severed from the remaining parts) cannot be used to sever the offending part of the termination clause. In particular, where a clause has been made void by statute, a severability clause has no effect on it (see North).

3. “An employment agreement must be interpreted as a whole and not on a piecemeal basis.” The termination provisions in an employment agreement must be read as whole to determine whether they violate the ESA.

4. In doing so, courts should recognize “the power imbalance between employees and employers, as well as the remedial protections offered by the ESA” and “focus on whether the employer has, in restricting an employee’s common law rights on termination, violated the employee’s ESA rights”.

Why would a termination-for-cause provision be unenforceable?

Most of these clauses say something like this: This agreement may be terminated for cause without notice or compensation in lieu.

However, the ESA only allows for dismissal without any notice or termination pay if there is “willful misconduct”, which has been interpreted as being different than just cause. There can be just cause for dismissal without willful misconduct, in which case the employee will be entitled to their statutory notice or pay. As a result, the typical termination-with-cause provision contravenes the ESA by providing lesser rights.

Takeaways

This decision will have a dramatic impact. Most termination clauses that we see will not withstand scrutiny. As a result, many readers may find that the termination clauses which they rely upon to minimize their severance costs are ineffective. When they dismiss employees without cause, their severance obligations will be far greater than they anticipated, and if they proceed on the assumption that the clause is enforceable, they are likely to incur substantial legal fees fighting a losing battle.

It is now 2020 and employment law is by no means settled; it continues to evolve. But one thing is clear: The importance of having properly drafted contracts cannot be overstated.