Another one bites the dust

Ontario employer unable to rely on termination clause

Another one bites the dust
Nadia Zaman

The year 2020 brought about several significant changes in employment law, including the decision in Waksdale v Swegon North America Inc by the Ontario Court of Appeal. The court held that a termination clause must be looked at in its entirety, and thus, despite the fact that the termination was without cause and the without-cause provision standing alone was fine, the "for cause" provision invalidated the entire termination clause as it breached the Employment Standards Act, 2000 (ESA).

As a result, the employee was entitled to common law reasonable notice. (Note that the employer in Waksdale sought leave to appeal to the Supreme Court of Canada, which has been denied.)

This decision was followed in Sewell v Provincial Fruit Co. Limited. The employee in Sewell was employed for about six months when he was terminated without cause. His employment contract contained the following termination clause: 

b) Termination by the Company for Just Cause 

The Company is entitled to terminate your employment at any time and without any notice or any further compensation for just cause and the Company will not have any further obligations to you whether at contract, under statute, at common law or otherwise. 

c) Termination by the Company without Just Cause 

  1. The Company will be entitled to terminate your employment at any time without just cause by providing you with the following:…
  2. (ii) a payment, or at the Company’s sole option, notice or combination of notice and pay in lieu of such notice representing termination pay and, if applicable, severance pay, as may be required under the Employment Standards Act, 2000, as amended from time to time (the ‘Separation Period’)…

It is agreed that upon compliance with the above provisions, the Company will be release[d] from any and all obligations to you, whether statutory, under contract, at common law or otherwise."

The employer relied on this termination clause to provide the employee with two weeks of pay and continuation of benefits (i.e. their statutory entitlement) in lieu of notice. The employee brought a motion for summary judgment seeking damages for wrongful dismissal. 

The Ontario Superior Court of Justice held in favour of the employee and found the termination clause was unenforceable for two reasons:

  • the without cause provision unlawfully combined notice and severance pay entitlements in violation of the ESA
  • as in Waksdale, the with cause provision "contracted around the ESA requirement to provide notice except in cases where an employee engaged in ‘willful misconduct.’" 

Waksdale was a somewhat controversial decision as it placed the validity of many existing contracts in jeopardy, potentially exposing employers to significant liability. By applying Waksdale, Sewell signalled that the principles can be applied more broadly. 

In addition, in Sewell, the court suggested the employer's duty of good faith includes the duty to explain key terms in an employment contract, such as a termination clause: 

"I accept the plaintiff’s evidence that he signed the contract expecting that it would accurately set out the main terms of his employment as discussed with the defendant, as well as comply with employment standards legislation. I also accept that he did not understand the full implications of the ‘termination’ clauses and that they were never explained to him. 

Given the power differential between the parties and the good faith basis upon which they had established their relationship, I accept that it was reasonable for the plaintiff to sign the contract without parsing out the potential meaning of the termination provisions or seeking independent legal advice."

This expectation is similar to the one established by the Ontario Superior Court of Justice in Battiston v Microsoft Canada Inc., where the court found the termination provisions of a stock awards agreement to be unenforceable given that the employer had failed to bring those provisions to the employee's attention. Sewell goes one step further to suggest that employers may have an implied duty of good faith to explain important terms of a contract before an employee signs the employment agreement, instead of simply bringing such provisions to their attention.

These decisions show that employers must carefully draft and implement employment agreements. Employers should also review their existing employment contracts to ensure they are still binding in light of such decisions.

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