'They argued there was never an intent to contract out of the ESA, but the court found differently'
An employer must provide pay in lieu of common law notice after an employment agreement was invalidated by the Ontario Superior Court of Justice.
It’s the latest in a line of decisions where a “for cause” termination clause that denies any payment to a dismissed worker makes the agreement unenforceable, says Lorenzo Lisi, leader of the Workplace Law Group at Aird & Berlis in Toronto.
“The language needs to be very general to say you're going to get the amounts under the [Employment Standards Act] at a minimum standard,” says Lisi. “Just stating that if you're terminated, you're not going to be entitled to anything except as may be required under the ESA.”
‘For cause’ termination
The 62-year-old worker was employed by Oz Optics, a supplier of fibre optic products in Ottawa.
The worker was hired in 2018 with an employment agreement that included a termination clause. The clause stated that Oz Optics could terminate his employment at any time without cause with the statutory minimum notice required by the Ontario Employment Standards Act, 2000 (ESA), or pay in lieu of notice, along with any applicable severance pay and benefits continuation.
The agreement also included a clause for termination for cause, stating that the company could terminate the worker for cause “without any notice or pay in lieu of notice or severance pay, or payment to the employee whatsoever, except payment of wages and vacation pay earned to the date of termination.” The clause provided examples of misconduct that could constitute cause such as “acts of theft, fraud, insubordination, conflict of interest and documented unsatisfactory performance.”
On Feb. 28, 2022, Oz Optics terminated the worker’s employment without cause, providing the statutory minimums.
The worker sent his resumé to about 30 employers in the Ottawa area and searched for jobs on an online platform. He also tried to network with contacts in his industry, but he didn’t receive any job offers by the fall of 2022.
The worker sued for wrongful dismissal, alleging that the termination clause in his employment agreement was unenforceable.
Oz Optics countered that there was no intent to contract out of its obligations under the ESA and also that the worker failed to make reasonable efforts to mitigate his losses.
Clear termination clauses can bring certainty to an employee’s post-termination entitlements, says an expert.
Termination provisions as a whole
The court noted that the Ontario Court of Appeal established in Waksdale v. Swegon North America, 2020 ONCA 391, that the termination provisions of an employment agreement must be taken as a whole for compliance with employment standards.
In the worker’s employment agreement, the court found a problem with the “for cause” termination clause. The court pointed out that the ESA does not include termination for cause – it has a narrower concept of what justifies forgoing severance pay or notice. Such misconduct, under the ESA, must be “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” The common law just-cause standard, which the worker’s termination clause used to justify no termination pay, was a lower standard, said the court.
“For cause” termination provisions have spelled the end of many employment agreements since Waksdale, so employers would be wise to do away with them, says Lisi.
If an employer is using an infringing employment agreement as a template for many employees, the liability could be significant, according to an employment lawyer.
Changing the language
“What employers are doing is putting in provisions that say that if you're terminated for any reason, you're going to get termination pay, severance pay, and benefits continuation for the [statutory notice] period,” he says. “Basically, it's saying, ‘We're going to guarantee that you get minimum ESA entitlements for termination for cause and if we can prove just cause like wilful misconduct, you don't even get your ESA termination pay.’
The court noted that the “for cause” provision provided examples of conduct that would constitute cause, but some of them – particularly unsatisfactory performance – would not be considered wilful misconduct, disobedience, or wilful neglect of duty under the ESA. As a result, the for-cause provision created a broader exemption from the employer’s obligation to provide severance pay and notice than the ESA, the court said.
Although Oz Optics said that there was no intent in the employment agreement to contract out of its statutory obligations, the court disagreed. A “for cause” provision sets out conduct that would free the employer of providing statutory notice or payment in lieu, but such conduct wasn’t serious enough to do so under the ESA, said the court.
It’s doubtful that Oz Optics actually intended to contract out of its obligations, but it was caught playing catch-up to the law when it didn’t review its employment agreements, says Lisi.
“You could see that [the agreement] went back three years, prior to Waksdale – back then, that was enforceable,” he says. “So they argued that there was never an intent to contract out of the ESA, but the court found differently.”
The Supreme Court of Canada has upheld the termination clause in a stock award agreement, disagreeing with a worker’s argument that he hadn’t read it.
Common law notice entitlement
Since the for-cause termination provision was unenforceable, the court found that the entire employment agreement was also unenforceable. Accordingly, the worker was entitled to common law reasonable notice of termination, it said.
The court found that the worker was in a highly specialized senior technical position and was at a relatively advanced age at the time of termination. It also agreed that the pandemic created an uncertain job market and there was stiff competition in the industry. The court determined that six months was an appropriate notice period.
The court also found that Oz Optics did not provide sufficient evidence to show that the worker failed to mitigate his losses. The company provided some job postings which it suggested could be possibilities, but it could not show that they were suitable or would have resulted in successful applications, said the court.
What Lisi finds interesting and potentially concerning for employers is that the court in this case seemed to up the ante on the employer’s onus with regards to the employee’s mitigation efforts.
“[The court agreed] that the onus is on the employer to prove the attempts at mitigation were unreasonable, and then said there was nothing on the record that they assisted the employee,” says Lisi. “They've integrated this concept that one of the factors that the courts will decide, even though there's nothing contractual, is whether or not the employer has assisted the employee in finding another job.”
An employment agreement’s termination clause was valid, but two other clauses that contemplated termination in breach of employment standards made the agreement unenforceable.
A helping hand
“You can certainly say that [assisting the worker’s job search] would have helped them, but that's now being used against the employer,” Lisi adds. “I think that adds to the employer’s obligation to prove lack of mitigation – which doesn't jive with when it was defined by the courts – and now it's completely on the employer to have to show not only that [the employee’s efforts] are unreasonable; they now they have to show that they made efforts to assist them with finding another job.”
A decision like this emphasizes how employers can help themselves by doing what they can to move along a dismissed employee’s mitigation efforts, adds Lisi.
“Years ago, we used to do these severance packages where every month, the employee would have to chime in and fill out a document on what efforts they've made at mitigation and whether or not the severance payments would continue if they didn't make those relevant efforts,” he says. “Send job openings to [the employee’s] counsel, and if the policy is to provide letters of employment, if they can put something in the letter which will assist them getting employed, they can do that as well.”
Oz Optics was ordered to pay the worker six months’ salary and benefits, less the statutory payments made at the time of termination.
It’s not just termination clauses that employers have to be careful of – other clauses that contemplate termination in violation of employment standards could spell trouble as well, says Lisi.
“Ensure that other provisions of your agreement, such as non-solicitation clauses, don’t eliminate the right to termination pay under the ESA, because some agreements say that if you breach this, you're terminated and you're not going to get anything afterwards,” he says. “Recent case law suggests that will also relate the enforceability of the agreement’s termination provisions, so do a thorough review of your agreements.”
“It's really important to review employment agreements almost yearly, after Waksdale and its changes after a short period of time.”
