'If an employer is using an infringing employment agreement as a template for many employees, the liability could be quite significant'
“Termination clauses can no longer be seen or read in an isolation of each other – they have to be read as a whole, so employers have to be very careful in reviewing their employment agreement templates from beginning to end, and ensuring that no provision of the agreement, whether it deals with termination or not, infringes on employees’ statutory rights to notice, severance pay, and benefits continuation under [employment standards legislation].”
Those cautionary words come from Rich Appiah, an employment lawyer and principal of Appiah Law in Toronto, following another Ontario court decision finding that an entire termination clause in an employment contract was unenforceable because one provision potentially breached the province’s Employment Standards Act, 2000 (ESA).
The 45-year-old worker was hired in 2018 by Oracle Global Services Canada, a software technology provider based in Mississauga, Ont., to be an application sales representative.
The worker signed an employment contract that included a termination clause which allowed Oracle to terminate his employment at any time for just cause “without any notice or pay in lieu of notice.” It also had a provision allowing for termination without cause with “minimum statutory notice or termination pay, minimum entitlement to benefit continuation and statutory severance (if applicable) in accordance with the employment standards legislation of the province in which you are employed.”
The worker worked for Oracle for about three years until the company terminated his employment without cause on Feb. 9, 2021.
Worker claimed contract was invalid
The worker sued for wrongful dismissal, claiming that he was entitled to common law damages because his employment contract was invalid. The termination clause’s for-cause provision breached the ESA because the “for cause” standard for which no notice or pay was provided denied him statutory termination pay under the ESA.
The Ontario Superior Court of Justice noted that the common law concept of just cause was broader than the ESA’s standard of cause that warranted no notice or termination pay. Under the ESA, only employees who were “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” were disentitled to the statutory minimum notice, whereas common law just cause could include incompetence or negligence in certain situations, said the court.
Read more: Ontario Court of Appeal decision puts without-cause termination provisions in peril
“The court’s concern was that what constitutes cause at common law is different than what constitutes cause for dismissal without notice under the Employment Standards Act,” says Appiah. “The term ‘wilful’ is really important, because it implies that the misconduct has to be intentional – the just cause standard under common law doesn't require intentional misconduct.”
Oracle argued that just because the employment contract didn’t “expressly mention what would occur in circumstances where the [worker] engaged in conduct” that constituted just cause but not wilful misconduct under the ESA, that shouldn’t make the termination provision invalid.
No assumptions of parties’ intentions
However, the court noted that the Ontario Court of Appeal had ruled earlier in the year that it wasn’t appropriate “to import the subjective intentions of the parties to comply with the ESA” or consider the level of sophistication of the employee signing the contract, in order to save a termination provision that otherwise violates the ESA based on its plain language.
In this case, the for-cause provision clearly stated that no benefits would be paid if the worker was dismissed for just cause, with no definition of “just cause” or any stipulation that it should match the ESA definition, the court said, adding that employers have had “plenty of notice” from the courts that termination clause language must comply with the ESA with “no room for guesswork.”
The court determined that the employment contract’s for-cause termination provision breached the ESA and, therefore, the entire termination clause was unenforceable, leaving the worker entitled to common law reasonable notice.
Power imbalance
Invalidating the entire termination clause because of one illegal provision is a principle that lies in the strict standard to which employers are held in drawing up employment contracts that comply with legislation, due to the vulnerability of employees in the employment relationship, says Appiah.
“When they're entering into employment agreements, courts don't expect employees to have the same amount of power and information to understand what they're giving up when they sign on,” he says. “And for that reason, courts have held employers to a very strict standard when determining whether an employment contract has sufficiently ousted the jurisdiction of the [employment standards legislation].”
Read more: Clarity is key to drafting and enforcing termination clauses
And courts don’t want to divide up termination clauses, particularly since the Ontario Court of Appeal’s 2020 decision in Waksdale v. Swegon North America, says Appiah.
“Our courts have taken the approach that termination clauses have to be read as a whole, and if any one part of the other termination provisions of an employment contract are unenforceable because they infringe the ESA, all of them will be held to be unenforceable.”
The court found that the worker’s skills as a commissioned salesperson were easily transferrable and his age of 44 at the time of termination wasn’t an obstacle. It also found that there was no evidence that the COVID-19 pandemic negatively affected his job search, as he found alternative employment within five months of his termination – at a higher salary and commission than at Oracle.
No ‘back-filling’ of damages
Oracle was ordered to pay the worker the equivalent of five months’ salary, commission, and benefits. Oracle argued that, since the worker was earning more at his new job, the difference in his new compensation should be used to “backfill” some of the five months before he found new employment, but the court disagreed.
Appiah agrees that the fact that the worker earned more money once he found work didn’t matter with regards to the period when he was out of work, and there should be no back-filling of damages during the notice period.
“If an employee has earned more income week-to-week or month-to-month during the notice period than he would have earned in his old employment, you don't take the excess and apply it to other parts of the notice period during which the employee wasn't employed,” he says. “If someone fully mitigated in one week, it doesn't mean that an employer has the right to apply it to periods of time during which the employee wasn't mitigating his damages because he didn't find other work.”
This latest in a series of Ontario court decisions invalidating termination provisions emphasizes that employers and their legal counsel must be careful in drafting and reading employment contracts, says Appiah.
“It's now incumbent upon [HR and] counsel to review employment contracts from beginning to end and really scrutinize whether there's any provision that infringes the ESA, because if any agreement takes a misstep in terms of the denying an employee a right under the ESA, it could render the termination provisions unenforceable,” he says. “And if an employer is using an infringing employment agreement as a template for many employees, the liability to that employer could be quite significant.”
See Nassar v. Oracle Global Services, 2022 ONSC 5401.
