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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.

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