October 30, 2017
The Court of Appeal has again ruled on the issue of terms in employment contracts which purport to limit an employee to minimum notice under the Employment Standards Act, 2000 (“ESA”) upon termination. In North v. Metaswitch, the Court of Appeal held that it is improper to use a severability clauses to remove portions of an invalid termination clause in an employment contract.
The ESA is minimum standards legislation, providing basic minimum entitlements for employees in Ontario. In line with this, section 5 of the ESA prohibits employers and employees from contracting out of any provisions of the ESA. Courts have repeatedly held that any contractual provisions which provide an employee with less than the minimum standard under the ESA are void. The court is often called upon to apply this principle in the context of termination provisions, wherein the employer attempts to limit an employee to ESA minimum notice upon termination, disallowing the employee from claiming for their common law notice period, which is generally more valuable. The court considers whether the provision is in fact not enforceable as drafted.
In North v. Metaswitch, the termination provision in the employee’s contract provided that the employer could terminate the employee for any reason, and provide notice in accordance with the provisions of the ESA. However, the termination provision also stated, “in the event of the termination of your employment, any payments owing to you shall be based on your Base Salary, as defined in the Agreement.”
As the employee also earned a commission, he took the position that the termination provision was in violation of section 5 of the ESA because it disentitled him to compensation for his commission during the notice period. The application judge agreed with the employee, finding that commissions were wages under the ESA, and all wages must be paid to the employee during the notice period. Therefore, the termination provision violated section 5 of the ESA. The application judge went on to then find that the words “base salary” could be severed leaving the employer free to terminate in accordance with the ESA.
However, the Court of Appeal overruled this finding.
The Court of Appeal held “where a termination clause contracts out of one employment standard, the court is to find the entire termination clause to be void, in accordance with s. 5(1) of the ESA. It is an error in law to merely void the offending portion and leave the rest of the termination clause to be enforced.”
The Court of Appeal found that the correct approach in reading severability clauses with regard to termination provisions is to first assess the termination clause to determine whether there is any contracting out of an employment standard. If there is, the termination clause is void. The severability clause is inoperative vis-à-vis the termination provision, but is not itself void.
The Court of Appeal articulated a key policy reason behind their decision – courts have long recognized the inequality of bargaining power in employment contracts. Employers have the ability and resources to draft contracts that comply with the ESA. If they violate the ESA in drafting a termination provision, they should not then be able to benefit from their error by the application of a severability clause, which a judge would use to make the provision ESA compliant and nevertheless limit the employee to their minimum ESA entitlements. In other words, the Court does not want to incentivize employers to draft illegal contracts, or to be careless as to whether the contract is illegal.
North clarifies the law in this area, and reaffirms what many employment law practitioners see as the correct way to analyze termination provisions in contracts. While it did not expressly refer to “blue penciling”, the removal of a few words from a contractual provision was held to be inappropriate by the Supreme Court of Canada in the case of Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6.