Employment agreements: The whole is greater than the parts

Ontario Court of Appeal rules termination provisions are only enforceable if all of their clauses are legal under employment standards legislation

Employment agreements: The whole is greater than the parts

Background
On June 17, 2020, 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. This decision is highly significant for employers in Ontario and its significance may extend to employers throughout Canada.

If any termination provision in an employment agreement is contrary to the requirements of employment standards legislation, then all termination provisions in the contract will be considered unenforceable — regardless of the existence of a severability clause, the Ontario Court of Appeal has ruled. As a result, any severability clause cannot be utilized to sever the offending portion of the termination provisions.

In Waksdale v. Swegon North America Inc., the employee, Benjamin Waksdale, began his employment as director of sales with Swegon North America, a manufacturer of indoor climate control systems in Markham, Ont., at approximately $200,000 per year. Swegon terminated Waksdale without cause eight months later and paid two weeks’ pay in lieu of notice. Waksdale sued for wrongful dismissal, arguing that he had not been provided reasonable notice of dismissal. He claimed six months’ pay in lieu of notice at common law and moved for summary judgment. Swegon defended on the basis of a termination clause restricting the employee’s entitlement.

The employment contract contained a “termination for cause” provision, which Swegon conceded breached the Ontario Employment Standards Act, 2000 (ESA), and a “termination of employment with notice” provision, which Waksdale 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... 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.”

Waksdale argued that the defective “for cause” provision rendered the entire employment agreement, or at least both of its termination provisions, void and unenforceable. His position was based on prior precedent, where the Ontario Court of Appeal had established that if a termination clause contracted out of an employment standards and, therefore, was void, any severability clause had nothing to which it could apply.

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 Ontario Superior Court of Justice
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 invalid “for cause” provision did not apply in this case and only the valid “with notice” clause was in effect in the circumstances.

“The [‘with notice’ clause] is unambiguous, enforceable, and stands apart from the [‘for cause’ clause],” the trial court said. “Indeed, the [‘for cause’ clause] itself specifically states that it applies only ‘if the company terminates your employment pursuant to this section…’”

The court dismissed the employee’s motion and action.

Decision of the Court of Appeal
The Ontario Court of Appeal disagreed with the motion judge and 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. 

The court relied on its earlier summary of the law regarding the interpretation of termination clauses in employment contracts in Wood v. Fred Deeley Imports Ltd. and emphasized that the following points 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, said the court, pointing out that the power imbalance in the employment relationship and the remedial protections of the ESA should lead courts to focus on whether the employer has violated the employee’s statutory rights. In this case, the lower court erred because it failed to read the termination provisions as a whole and applied a piecemeal approach that didn’t consider their combined effect, said the court.

“The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA,” said the Court of Appeal. “Further, it is of no moment that [Swegon] 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.”

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 Ontario Court of Appeal’s decision in Waksdale has added a new and 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 be 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 employment standards legislation.

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

  • Draft termination “with notice” provisions utilizing language that states unequivocally that the parties intend to displace the employee’s common law reasonable notice rights.
  • Explicitly reference all minimum entitlements under the statute.
  • 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”).
  • State that if the termination clause falls below the requirements of the ESA now or in the future, it should be interpreted as complying with those requirements.

Given this new reality, employers should review their employment contracts to ensure that all of their termination provisions comply with employment standards legislation.

For more information, see:

  • Waksdale v. Swegon North America Inc., 2020 ONCA 391 (Ont. C.A.).
  • Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (Ont. C.A.).

 

George Vassos is a partner with Littler LLP in Toronto, practising on a wide variety of labour and employment law issues. He can be reached at (647) 256-4504 or [email protected] Rhonda B. Levy is knowledge management counsel for Littler LLP in Canada, monitoring legislative, regulatory and case law developments. She can be reached at (647) 256-4545 or [email protected]

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