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Ontario Court of Appeal Rules on the Enforceability of Termination Clauses

Waksdale v Swegon North America Inc. is a recent case in 2020 released by the Ontario Court of Appeal involving an employee that was terminated from his employment without cause. The employee’s employment contract contained a termination clause that sought to limit his entitlements to severance pay to the minimum amounts prescribed by the Employment Standards Act (ESA). However, the employee challenged the enforceability of the termination clause on the basis of the termination for just cause component of the clause, even though he was terminated without cause.

The termination provision in the employment contract was written as follows:

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. All reimbursement for business expenses shall cease as of the date of termination of your employment, however, you shall be reimbursed for legitimate business expenses that have been incurred and submitted to the Company but not as yet paid you to that date. 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 contract also contained a termination for just cause provision. The wording of the termination for just cause provision breached the terms of the Employment Standards Act, 2000 (“ESA”), and the employer recognized this at trial. This component of the termination clause was therefore void and unenforceable – however, the employer argued that it was irrelevant and inapplicable as the case at bar involved an employee that was terminated without cause, and that component of the termination clause was written in an enforceable manner, that limited the employees entitlements on termination.

The Plaintiff argued that the contract was not enforceable because the termination for just cause provision was void.

The Ontario Court of Appeal agreed and held as follows:

An employment agreement must be interpreted as a whole and not on a piecemeal basis. The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA. Recognizing the power imbalance between employees and employers, as well as the remedial protections offered by the ESA, courts should focus on whether the employer has, in restricting an employee’s common law rights on termination, violated the employee’s ESA rights. While courts will permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal. In conducting this analysis, 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.

What Makes a Termination for Cause Provision Void and Unenforceable?

As written in previous blog posts, an employer has the right to terminate an employee for just cause where egregious misconduct has been displayed. For cause termination have been considered the ‘capital punishment’ of employment law.

Examples of “Just Cause” at common law include:

  • Repeated breaches of company policy
  • Repeated Truancy
  • Violence or Harassment
  • Dishonesty
  • Insubordination

When terminating for just cause, employers are still required to pay ESA Notice and Severance unless that employee “has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”.

Unless your employment contract explicitly carves out a distinction between termination for Just Cause and termination for “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”, it may be void and unenforceable, as was found by the Court of Appeal in the Waksdale decision. As a result, your employment contract’s “Termination Without Cause” provision might also be found unenforceable.

Many employment contracts in Ontario will need to be amended and updated. Otherwise, employers risk their termination provisions being unenforceable, which means they will owe employees common law reasonable notice. Common law reasonable notice often works out to months or years of notice rather than weeks under the ESA.

Employers Need New Employment Contracts

In conclusion, employers need to update their employment contracts. Doing so is inexpensive and pays substantial dividends at termination time. As noted, the difference in notice period, for an employee with an enforceable termination provision versus one without, can be months or years of pay.

Severance Package as Lump Sum Payment or Salary Continuance

When an employee is terminated from their employment without cause, they are entitled to a severance package. The amount of severance they are entitled to is based on the Employment Standards Act (“ESA”) in Ontario and the common law (i.e., judge-made law). The common law has evolved with various precedent cases that have set out factors that are relevant in determining a terminated employees severance pay entitlements. Common law severance entitlements are much greater than the statutory minimum entitlements outlined in the ESA.

Note that this discussion only applies to employees that have been terminated without cause from their employment. Those employees that have been terminated for just cause are not entitled to any severance; however, as we have discussed here in our article on terminated senior executive employees for just cause, and as outlined by the Supreme Court of Canada the threshold for establish just cause is very high. The onus of establishing just cause is on the employer – and if they are unable to satisfy the onus, the employee is then entitled to severance pay and was subject to a wrongful dismissal.

Are You Entitled to Severance Pay Based on the Common Law?
The analysis as to whether a terminated employee is entitled to common law “reasonable notice” of termination, over and above the minimum statutory entitlements prescribed in the ESA (which amounts to one-week per year worked of termination pay, up to a maximum of 8 weeks total; and 1 week of severance pay [subject to satisfying various conditions] up to a maximum of 26 weeks of pay) is firstly based on the terms of the employment contract.

Prudent employers will seek to include “termination clauses” in employment contracts which limit the amount of severance an employee is entitled to upon the without cause termination of employment. The specific language of the clause is very important in determining its enforceability; as such, it is important that employees reach out to a qualified employment lawyer to review the terms of contract. If such clauses are deemed enforceable, which is based on the strict language of the clause, then the employees entitlement upon termination will be limited. If, however, there is an argument that the clause would be unenforceable, this can often mean 10’s of thousands of additional severance entitlements for the employee.

If you are deemed entitled to reasonable notice of termination based on the common law, the employer can pay out your severance in one of two ways: (i) on a lump sum basis; and (ii) on a salary continuance basis. The employer does not have the obligation to pay employees on a lump sum basis despite the oft-held preference. With respect to salary continuance severance payouts, employers will often include a “claw-back” clause, which serves to reduce the remaining severance payments (i.e., by 50.0% of the amounts owing) should the employee secure comparable employment during the notice period.

This clawback clause relates to the employees duty to mitigate its damages following the termination of employment – by seeking out new and comparable employment. The language behind the salary continuance clauses and the severance package agreements in generally should be reviewed by an employment lawyer in the province in which you reside to ensure you are protected to the fullest extent of the law.

Fixed Term Contracts – Termination Clauses

Employers may wish to enter into fixed-term employment contracts for various reasons, most commonly where the employee is hired to complete a specific project or task for the employer with a defined deadline or where the employee has been hired during another employees leave of absence (i.e., maternity leave, sick leave, disability-related absence, etc.). When the full-time employee returns from leave, the services of employee that is working on a fixed-term contract will no longer be required.

Substantial litigation in Ontario has surrounded the early termination of fixed-term employment contracts. In other words, how much is the fixed-term employee owed if the employer opts to terminate their employment prior to the end of the expiry of the fixed term? In some cases, a clear and unambiguous termination clause will obligate the employer to only pay the amounts indicated in the clause (i.e., typically, 2 weeks of advanced notice of early termination or payment in lieu thereof); however, where these restrictive early termination clauses are ambiguous, they will be interpreted and construed in favour of the employee, in accordance with the principle of contract law referred to as contra preferentem.

As noted in Howard v. Benson 2015 ONSC 2638, in the absence of an enforceable (i.e., unambiguous) contractual provision, a fixed term employment contract obligates an employer to pay an employee to the end of the term and the obligation will not be subject to mitigation.  Where the language of a termination clause is unclear or can be interpreted in more than one way, the court should adopt the interpretation most favourable to the employee (Wood v. Fred Deeley Imports Ltd. 2017 ONCA 158).

Ambiguity can relate to any number of factors. In one case, our clients fixed term employment contract stipulated a minimum notice requirement but not a maximum. In other words, there was no language that clearly indicated that the 2 weeks notice represented all obligations of the employer to the employee on termination.In addition, it is a complete contradiction in terms to suggest that a contract is for one-year and then say it may be for just two weeks, at the whim of the employer. 

It is arguable that all fixed term contracts that purport to allow early termination for unspecified reasons ought, in principle, to be considered ambiguous, and interpreted contra proferentem.   However, there does not yet appear to be any jurisprudence which goes quite so far.  The point wasn’t raised in Benson, which looked instead for technical ambiguities in the wording of the termination clause itself.  It seems to me to be a contradiction in terms to state that you have a contract for a year, and then say that it might be a contract for just two weeks, at the whim of the employer.  

In any event, if you are an employee that has been terminated prior to the end of a fixed term contract, it is in your interest to have the severance package reviewed by an employment lawyer to determine whether the employer has provided you with your full entitlements based on the wording of your employment contract.

Updating and Amending Employment Contracts

After you have worked for a company for a period of time, your employer may request to update or amend your employment contract for any number of reasons. These reasons typically include an update to reflect a promotion or change in job position, a demotion, a restructuring of the organization, change in the amount of compensation earned (i.e., from salary to commission or vice versa), a change in the location of where job duties are to be carried out (i.e., at home or remote, or a new company office) and any other changes.

In order for an updated or amended employment contract to be considered enforceable by the Courts in Ontario, it must be accompanied by fresh consideration. In other words, and as noted in the BC Court in the case of Krieser v. Active Chemicals Ltd, 2005 BCSC 1370, an updated employment contract will only be enforced if there is a further benefit to both parties.

One of the common and relevant terms that employers attempt to include in updated employment contracts are restrictive termination clauses. We have written about the impact that a restrictive termination clause can have on your severance entitlements in the event of a without cause termination from employment here. A restrictive termination clause, if properly drafted, and compliant with the Employment Standards Act (“ESA”) in Ontario, will limit a terminated employees severance entitlements to the minimum amounts prescribed by the employment standards legislation in the province.

The minimum termination entitlements of an employee terminated without cause in Ontario is equivalent to one-week of termination pay per year worked up to a maximum of 8 weeks pay; and one-week of severance pay per year worked up to a maximum of 26 weeks, in the event a certain eligibility test for severance is satisfied, as further described here. These represent an employees minimum entitlements, which are applicable in the event a restrictive termination clause is included in an employment contract.

Absent such a termination clause, terminated employees are entitled to “reasonable notice” of termination, further described here. Severance packages calculated on the basis of reasonable notice are substantially higher than those that are merely based on the ESA minimums. These packages can amount to awards of 1 month of more per year of service, rather than the one week per year enumerated in the ESA. Accordingly, it can amount to a huge financial gain for the employee to receive reasonable notice on termination rather than the statutory minimum. Accordingly, an updated employment contract with the inclusion of a restrictive termination clause can be of immense benefit to the employer and detrimental to the employee. As such, Courts will not enforce such updates absent fresh consideration (or benefit) flowing between both parties.

Reasonable notice is calculated based on a host of factors recognized by Ontario Courts over the years, including but not limited to the following:

-Age of the employee (more advanced age employees are entitled to larger severance packages, all else equal);
-Years of service (the longer duration of employment will justify a larger severance award);
-Specialization and availability of comparable employment (as severance packages are designed to bridge the gap during a period of unemployment, employees with highly specialized jobs may find it more challenging to find comparable employment after a termination);
-Income level;
-Other unique circumstances.

Clearly there is a large benefit to receiving reasonable notice on termination. As such, if an employer attempts to update your employment contract, it is best to contact a qualified employment lawyer for a review.

Is Your Non-Competition or Non-Solicitation Clause Enforceable?

At Goldstein Law, we are a Toronto-based law firm that focuses on employment law. In the course of our employment law practice in Ontario, we frequently consult employers and employees on the drafting of employment contracts and the interpretation of various terms contained in employment contracts.  One of the recurring issues that we are retained to address is the enforceability of non-competition and non-solicitation clauses (also referred to as “restrictive covenants”).  After you are terminated from your employment, the last thing you want to do is “sit on the bench” and wait for a non-compete period to expire or risk a lawsuit for breach of the contract.

Conversely, employers often require these terms in their employment contracts to (1) protect confidential information that employees accumulate through their tenure of employment from being distributed freely to competitors; and (2) prevent the terminated employee from seeking out previous clients of the former employer, or colleagues, to leave and join a new venture.

In this post, we will define the terms “non-compete” and “non-solicit” and discuss some of the relevant factors that will determine whether your clause would be enforceable based on the common law in Ontario. Further, we provide employees with some practical advice in the event they are terminated from their employment and their previous employment contract contains a non-compete or non-solicitation clause.

What Is A Non-Competition Clause?

A clause that restricts an employees ability to join a competitor company or form a new business in the same or similar line of business to their employers. An example of a non-competition covenant in an employment contract of an employee that was terminated without cause from a consumer electronics store was drafted as follows:

Should you leave X company for any reason you shall not for a period of 6 months after the termination of your employment, without written permission, directly or indirectly, engage in any undertaking or business as an employee, principal, agent, or consultant with a Competitor. A “Competitor” includes a retail business operation in Canada which has as its principal business the sale of X. 

What is a Non-Solicitation Clause?

A clause in an employment agreement that restricts the employee from approaching former clients or colleauges of the employer to encourage them to leave for a new opportunity. An example from the same employment contract referenced above is as follows:

During the Restriction Period, you will not, directly or indirectly, contact, solicit or hire any employee, consultant, supplier or customer of X company, or assist any other person or business to do so, for the purpose of enticing the individual or entity to enter their relationship with X. 

Is the Non-Competition and Non-Solicitation Clause Enforceable?

As a general rule, Courts in Ontario are loath to enforce these provisions in employment contracts as they act as a “restraint on trade.”  In other words, the clauses act as a barrier to the former employee to earn income. As a result, the enforcement of non-competition clauses is especially difficult.  A Court is more likely to enforce a non-solicitation clause, which is designed to prevent the employee from contacting former clients for a defined period of time – but does not act as wholesale prevention from carrying on business in their specialized area.

What Factors make Non-Competition and Non-Solicitation Clauses Enforceable

Geographic Scope
The more limited the geographic scope, the more likely the clause will be found enforceable.  With the advent of social media, geographic restrictions are generally no longer found as pertinent to non-solicitation clauses, as prospective clients can easily be contacted online no matter where they reside. 

Length of Restriction
There needs to be an end date for the provision. While each fact scenario is different, the shorter the restriction, the more likely it is to be enforceable.

Scope of Prohibited Activity
Some clauses may prohibit the employee from working for a defined list of competitors, or it may be worded so broadly to prevent the employee from working for any company in a large industry. The more narrowly drafted and defined the prohibited activity, the more likely the clause will be enforceable.

This post was drafted by Jeff Goldstein, principal lawyer at Goldstein Law. If you would like more information about employment contracts generally or non-competition or non-solicitation clauses specifically, feel free to reach out to jeff@goldsteinlawyers.ca.

Terminating a Fixed-Term Contract

If you are an employee of a company, it is likely that you are working for the employer in accordance with the terms of an employment contract. A standard employment contract that does not indicate any ‘term’ or length of employment, is presumed to be of “indefinite duration.” An indefinite duration employment contract has no fixed end date; accordingly, the employee continues to accumulate service with the employer over time.

If no triggering event occurs, such as (1) the employer terminating the employee’s employment without cause; (2) the employer terminating the employees’ employment for just cause; (3) the employee resigning from his or her employment; (4) the employee resigns from his or her employment as a result of an intolerable work environment (commonly referred to as a constructive dismissal) or resigns for other opportunities, then the employee is deemed to continue in his or her employment for the foreseeable future.

Conversely, a fixed-term employment contract stipulates a start date and an end date of employment. Employers will typically hire workers on a fixed-term contract to replace other workers that are on leaves (i.e., maternity leave) for a defined period of time or to increase staffing levels for a specific project. The worker can still be considered an employee of the company (not an independent contractor) and the regular protections of the Employment Standards Act are still afforded to the employee operating under a fixed-term employment contract; however, the most important provision to consider when entering into such a contract is the language contained in any termination provision.

In a fixed-term employment contract, the employer does not automatically have the right to terminate the contract early and provide reasonable notice or payment in lieu thereof as is required in the dismissal of an employee operating under an indefinite duration employment contract. Rather, the parties to the fixed-term contract must clearly and unambiguously set out what the severance obligations of the employer are should the employment contract be terminated before the end of the fixed-term. Absent clear and specific language in the fixed-term contract around the amount of termination pay a fixed-term employee is entitled to should the contract be terminated before the end of the term, the employee is entitled to be paid out for the balance of the contract.

In other words, if you are an employee that was hired for a one-year fixed term contract and the employer terminates your employment after 6 months on the job, you may be entitled to payment of the entire balance of the contract (i.e., remaining 6 month period). Accordingly, in the context of a fixed-term employment contract, employers’ could be on the hook for much more than the employees’ common law severance entitlements which would apply if an indefinite duration contract governed the employment relationship. While employers’ are permitted to enter into fixed-term contracts, and sometimes do so in the expectation that severance obligations will be minimized or avoided in the event of termination, the opposite often results. For employees, your entitlement depends on whether the fixed-term employment contract contains an enforceable termination provision which limits your entitlement on termination.

As always, it is best to consult a highly-rated employment lawyer to review your employment contract and the circumstances around your dismissal to determine whether you have any right to greater severance or other damages that have been provided to you by your former employer.