Check your Employment Agreements: Ontario Courts bring Uncertainty to Termination Provisions

The enforceability of termination clauses within employment contracts is a matter that Ontario’s courts frequently adjudicate on. Lately, this has been an area filled with uncertainty, as courts vacillate between broad interpretations of contracts that favour employers and approaches that narrow the enforceability of termination clauses. The findings of the Ontario Court of Appeal in the 2020 case of Waksdale v. Swegon North America Inc (Waksdale) were far-reaching, with the potential to leave the termination provisions within many agreements unenforceable. Now, with the Supreme Court of Canada’s decision on January 14, 2021, denying leave to appeal, business owners and employers should be aware the Court of Appeal’s decision will remain binding across Ontario.

Importance of the Waksdale Decision

In Waksdale, the employee plaintiff was dismissed without cause and received severance in line with the termination without cause provisions in the employment agreement. Mr. Waksdale responded with an action alleging that the terms in the agreement concerning termination with cause were not enforceable on the basis that they violated Ontario’s Employment Standards Act (“ESA“). Importantly, Mr. Waksdale accepted that the “without cause” provisions which applied to his termination were lawful, with the employer admitting that the “termination for cause” clause challenged by Mr. Waksdale violated the ESA. Notably, the employment agreement also contained a severability clause which would normally sever unenforceable terms from the agreement leaving the remainder intact. The motions judge determined that although some of the termination clauses were unlawful, the “termination without cause” provisions were valid and could be enforced.

The Ontario Court of Appeal disagreed, overturning the original decision.

The principal question the Court of Appeal dealt with was whether a single unlawful termination clause could leave a separate and valid clause unenforceable, even in the presence of a severability clause in the agreement. There were two key findings in the Court’s analysis.

  1. Employment agreements must be read as a whole.

Employment agreements and termination clauses are to be considered as a whole, not piecemeal, and without separating the “with cause” and “without cause” parts as the motions judge had done. The proper approach is to decide whether the termination provisions together violate legislation, and if they do, courts will not enforce them.

  1. Severability clauses in employment contracts will not save unlawful provisions.

The employer hoped to use the severability clause to preserve the lawful terms, but the Court of Appeal refused to do so. A severability clause cannot have any effect on clauses made void by a statute. And since the termination clauses must be read together, it could not sever just the unlawful portion. Consequently, severability clauses in employment agreements confer much less protection.

Terminations in Ontario after Waksdale

The Waksdale decision is a reminder of how courts interpret contracts. When evaluating termination provisions, it does not matter whether they are found in one place in the agreement, separated, or in any way linked. Going forward, they will be read together. The Court of Appeal also noted the power imbalance in the employment relationship and the fact that the ESA is remedial legislation. Recognizing that employers may still gain a benefit even if they do not rely on an illegal termination clause may have coloured the analysis.

The significance of Waksdale is that if a termination provision is unenforceable the employment contract will not govern the termination, and without any contractual limits to termination benefits, employees will be entitled to common law reasonable notice if dismissed without cause. For employers, the risk is those benefits may be more generous than what they anticipated providing under the contract.

Rather than Waksdale being an isolated example, it is already being relied on in Ontario and was cited in Sewell v. Provincial Fruit Co. Limited to strike down another termination clause. Following the Waksdale precedent, the judge in Sewell looked at the entire employment agreement and found both the “with cause” and “without cause” provisions to violate the ESA. Instead of distinguishing Waksdale, the judge accepted that the illegality of one clause voids the entirety of the agreement.

Get Advice to Protect Yourself and Manage Business Risk

The course set by Waksdale may quickly become a trend within Ontario. Following the Court of Appeal’s decision, there was speculation that the unique facts in Waksdale could limit its future application. Now, as courts continue to outline the circumstances in which contractual termination clauses are found to violate the Employment Standards Act, it will be increasingly difficult to argue a disputed contract is valid. Employers should have their employment contracts reviewed to ensure they have mitigated their risk for litigation, and employees presented with a termination notice should seek legal advice.

Navigating the termination of an employee is more complicated than it appears. To manage risk and avoid costly litigation, contact GLG LLP litigation lawyer in Toronto for experienced and strategic advice for your business planning and employment law solutions. During this period of economic uncertainty, it is crucial that employers are up to date on their obligations. Our lawyers can be reached at 416-272-7557 or contact us online to learn how we can help.