It’s Time to Review Your Termination Provisions…Again!
August 5, 2020
Waksdale v. Swegon North America Inc.: Unenforceable “For Cause” Termination Provisions Render “Without Cause” Termination Provisions Null and Void
Over the past few years, the Ontario Court of Appeal has released a number of decisions considering the enforceability of termination provisions. For the most part, the recent jurisprudence has focused on the necessary wording and structure of a termination provision in order to successfully rebut the common law presumption of reasonable notice. In its recently released decision, Waksdale v. Swegon North America Inc., 2020 ONCA 391 (“Waksdale“), the Ontario Court of Appeal once again honed in on termination provisions. However this time, it was an unenforceable “for cause” termination provision that rendered the “without cause” termination provision unenforceable. This decision has, in the view of many, changed the law in Ontario with respect to the enforceability of termination clauses and significantly impacts upon the application of severability clauses in employment agreements.
On termination, there is a common law presumption that an employee is entitled to reasonable notice of termination. Reasonable notice at common law generally provides a much greater entitlement than the minimum requirements on termination set out in the Ontario Employment Standards Act (“ESA”). However, this common law presumption can be rebutted with an enforceable employment agreement that specifies some other entitlement on termination as long as the entitlement is equal to or greater than the ESA minimums.
Employees are often terminated on a “without cause” basis, even where there are performance or other employment related concerns, due to the high threshold required to support a termination for cause at common law. Until very recently, for enforceability purposes, the predominant view has been that a termination for cause provision was considered separate and apart from a “without cause” provision, unless the two clauses were inextricably linked. Now, the Court of Appeal’s decision in Waksdale has held that an unenforceable “for cause” termination clause renders all termination provisions unenforceable for all purposes, even if the termination at issue was “without cause”.
The Plaintiff in Waksdale was terminated without cause and sued for damages in lieu of reasonable notice. The employment contract between the parties contained the following arguably separate and discreet clauses:
- “Termination for Cause” provision, which contained 14 enumerated grounds that would result in termination without notice. A number of the enumerated grounds would arguably not rise to level of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” required by the ESA to relieve an employer from paying ESAtermination entitlements, such as:
- failure to immediately inform management of receipt of gifts or favours valued at greater than $100.00 annually; and
- documented warnings with respect to the performance of your duties that the Company considers to be unsatisfactory.
It is worth noting that the Termination for Cause provision included a clause, which stated:
“In the event that a Court of competent jurisdiction determines that the Company was not justified in terminating your employment for cause, then you agree that your notice entitlement is limited to only as described above under the heading “Termination of Employment with Notice”. [“Saving Clause”]
- A “Termination of Employment with Notice” provision, which provided that upon a termination “without cause”, the employee would 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 ESA.
- The employment contract also included a severability clause that purported to make any illegal clause severable from the rest of the employment agreement.
The employer conceded the Termination for Cause clause violated the ESA and was therefore void and unenforceable. Thus, neither the motion judge nor the Court of Appeal was called upon to determine the precise manner in which the Termination for Cause provision violated the ESA.
Since the employee was terminated without cause, the employer argued that the two termination clauses should be considered separately and the unenforceability of the Termination for Cause provision should have no bearing on the validity of the Termination of Employment with Notice provision.
On a motion for summary judgment, the motion judge held that the Termination for Cause provision was a stand-alone, unambiguous, and enforceable clause and dismissed the employee’s action. The employee appealed.
The Court of Appeal found that the correct analytical approach is to determine whether all the termination provisions in an employment agreement, read as a whole, violate the ESA. The Court ruled that it is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are linked.
The Court noted that the mischief associated with an illegal provision is that an employer may gain the benefit of an illegal clause even when the employer does not rely on it. For example, an employee who is not familiar with their rights under the ESA, and signs a contract that includes unenforceable termination “for cause” provisions, may incorrectly believe they must behave in accordance with these unenforceable provisions to avoid a termination for cause. If then an employee strives to comply with these overreaching provisions, then the employer may benefit from these illegal provisions even if the employee is eventually terminated without cause on terms otherwise compliant with the ESA.
The Court also refused to allow the severability clause to save the Termination for Cause provision. A severability clause, the Court noted, cannot have any effect on clauses of a contract that are void by statute, like the ESA. Having concluded that the Termination for Cause provision and Termination of Employment with Notice provision are linked together, the Court held that severability clause cannot apply to sever the offending portion of the termination provisions. Further, although not expressly addressed in the decision, the Saving Clause at the end of the Termination for Cause provision (quoted above) did not remedy its unenforceability.
The Court of Appeal set aside the motion judge’s order and remitted the matter back to the motion judge to determine the quantum of the employee’s damages and the costs of the action.
The Court’s approach in considering all the termination provisions as a whole and refusing to apply the severability clause to save the offending provision is a significant development in the law regarding enforceability, with potentially far-reaching consequences for employers and significant upsides for employees. .
Also, it can be inferred from the Waksdale decision that any language that permits termination for cause in circumstances beyond those expressly permitted under the ESA may impact the enforceability of the termination provisions as a whole. We will continue to monitor whether the employer in this case will seek leave to appeal to the Supreme Court of Canada.
In light of this decision, and the constantly evolving law regarding termination provisions and employment agreements generally, employers are strongly encouraged to seek legal advice regarding the enforceability of their existing employment contracts. If you have any questions regarding this decision or any other employment related issues, please contact any member of our Koskie Minsky Employment Law team here.