Blow to Termination Provisions in Employment Agreements

Written by on July 23, 2020 in Employment Law Blog, Focus on Canadian Cases
Employment Agreements

Due to a significant decision recently released by the Ontario Court of Appeal, your employment agreements will likely need to be re-drafted.

In Waksdale v. Swegon North America Inc., Ontario’s highest court held that where a termination clause in a contract of employment contains even a single violation of an employment standard in the termination section, the entire termination clause is void and inoperable for all purposes.

The Facts

When Benjamin Waksdale was hired by Swegon North America Inc. as Director of Sales, he signed an employment agreement containing two termination provisions: “Termination with Notice” and “Termination for Cause.”

After only eight months, Waksdale’s employment was terminated without cause.

Swegon provided Waksdale with two weeks’ pay in lieu of notice, relying on the Termination with Notice provision, which permitted it to terminate Waksdale’s employment without cause by providing his minimum entitlements to notice, severance pay and benefit continuation under the Employment Standards Act, 2000, plus an additional one week’s pay.

Waksdale brought a wrongful dismissal action against his former employer, seeking six months’ pay in lieu of notice at common law.

The Case

Although he acknowledged that the Termination without Notice provision under which he was terminated was compliant with the ESA, Waksdale argued that the Termination for Cause provision contravened the legislation, rendering both provisions void and unenforceable.

Swegon conceded that the Termination for Cause provision was unenforceable, and took the position that it was separate from the Termination with Notice provision and, as Waksdale was terminated without cause, the unenforceability of the Termination for Cause provision was irrelevant. Swegon further argued that if necessary, the Termination for Cause provision could be severed from the agreement by the severability provision.

The motion judge agreed with Swegon and dismissed Waksdale’s action, finding that the Termination for Cause provision was a stand-alone provision and was not relevant to determining Waksdale’s notice entitlements upon termination without cause. As the relevant provision complied with the ESA, Waksdale had no entitlement to notice of termination at common law.

The Court of Appeal overturned the motion judge’s ruling, however, concluding that the illegality of the Termination for Cause provision rendered the Termination with Notice provision unenforceable, entitling Waksdale to reasonable notice of termination at common law.

In arriving at this decision, the court noted the power imbalance between employees and employers and emphasized that the ESA is remedial legislation intended to protect the interests of employees and must be interpreted in a way that encourages employers to comply with its requirements. The court held that termination provisions in an employment agreement must be interpreted as a whole and not on a piecemeal basis. It is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are by their terms otherwise linked.

The court also refused to apply the severability provision to save the otherwise valid Termination with Notice provision, finding that “a severability clause cannot have any effect on clauses of a contract that have been made void by statute.”

The Takeaway

The Court of Appeal’s finding that even where a “without cause” termination provision is perfectly drafted and otherwise enforceable, it will be deemed unenforceable if the “for cause” provision is not complaint with the ESA, has dealt a significant blow to employers. Absent a successful appeal to the Supreme Court of Canada, this decision will have wide-ranging ramifications both for employers, as many – if not most — employment contracts contain wording similar to the one contained in this case.

Employers must ensure that their contracts do not contain any provisions which run afoul of employment standards legislation, as these will render the entire termination clause void.

We urge you to seek advice from an experienced employment lawyer in light of these developments. Updating your employment contracts is simple and inexpensive compared to legislation and potentially paying months or years in lieu of notice.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. If you have any questions on employment standards and termination clauses or require advise on drafting, reviewing or updating employment agreements please contact us or call us at 905-477-7011. Sign up for our newsletter to receive up-to-date Employment Law information, including new legislation and Court decisions impacting your workplace.

Please note that this article is for informational purposes only and does not constitute legal advice.

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