Earlier this year, the Ontario Court of Appeal released its landmark decision in Waksdale v. Swegon North America Inc. This decision has now been relied on by the Ontario Superior Court of Justice to strike down another termination clause in Sewell v. Provincial Fruit Co. Limited.
In Waksdale, the plaintiff was dismissed without cause and brought a wrongful dismissal action against his employer, alleging that the termination clause in his employment agreement was not enforceable. Interestingly, the parties agreed that the “without cause” provision in the agreement was enforceable, but that the “for cause” termination provision was not enforceable because it failed to account for the employee’s entitlements under the Employment Standards Act, 2000 (the “ESA”). Crucially, the Court of Appeal held that a termination clause must be looked at in its entirety. In other words, that it was not possible to sever only a problematic portion of the clause, leaving the other sections intact. Thus, even though Swegon had not dismissed Waksdale for cause and was not relying on the void “for cause” provision, the Court struck out the termination clause in its entirety and awarded damages to Waksdale at common law.
This decision has had sweeping implications for employers in Ontario, many of whom have been left scrambling to update their employment agreements to ensure they account for the requirements of the ESA. As the employer has sought leave to appeal to the Supreme Court of Canada, it remains to be seen whether the state of the law will change once again.
In the meantime, Waksdale is already having an impact on how judges are assessing the enforceability of termination clauses. In Sewell, the plaintiff was employed by the defendant for less than a year when he was terminated without cause. Sewell had signed an employment agreement at the time he was hired which contained the following termination clause:
b) Termination by the Company for Just Cause
The Company is entitled to terminate your employment at any time and without any notice or any further compensation for just cause and the Company will not have any further obligations to you whether at contract, under statute, at common law or otherwise.
c) Termination by the Company without Just Cause
(A) The Company will be entitled to terminate your employment at any time without just cause by providing you with the following:
(ii) a payment, or at the Company’s sole option, notice or combination of notice and pay in lieu of such notice representing termination pay and, if applicable, severance pay, as may be required under the Employment Standards Act, 2000, as amended from time to time (the “Separation Period”);
It is agreed that upon compliance with the above provisions, the Company will be release from any and all obligations to you, whether statutory, under contract, at common law or otherwise.
Relying on this clause, the employer provided Sewell with only two weeks of pay in lieu of notice and benefit continuation. Sewell commenced an action seeking damages for wrongful dismissal and brought a motion for summary judgment.
The court allowed the motion and found that the employment agreement was “illegal and unenforceable”, as it violated the minimum standards set out in the ESA. Unlike in Waksdale, here the court actually took issue with both the with cause and without cause provisions, finding that the without cause provision unlawfully combined notice and severance pay entitlements in violation of the ESA. In addition, the court confirmed that, as per Waksdale, the with cause provision “contracted around the ESA requirement to provide notice except in cases where an employee engaged in “willful misconduct.”
The Sewell case is significant because it gave the court the opportunity to apply the findings in Waksdale outside the unique context of that case. As noted above, in Waksdale, the parties agreed about the enforceability of the with and without cause provisions. That led some lawyers to speculate as to whether Waksdale could be distinguished on these grounds. The Sewell decision effectively puts an end to that speculation.
Although the court found the clause to be unenforceable on the grounds noted above, there were also some interesting comments made regarding an employer’s duty of good faith at the pre-hiring stage. Specifically, the court appeared to suggest that an employer may have a good faith obligation to identify and explain the implications of key clauses in a contract, including a termination clause, at the time of signing:
I accept the plaintiff’s evidence that he signed the contract expecting that it would accurately set out the main terms of his employment as discussed with the defendant, as well as comply with employment standards legislation. I also accept that he did not understand the full implications of the “termination” clauses and that they were never explained to him.
Given the power differential between the parties and the good faith basis upon which they had established their relationship, I accept that it was reasonable for the plaintiff to sign the contract without parsing out the potential meaning of the termination provisions or seeking independent legal advice.
These comments are somewhat consistent with the recent decision in Battiston v Microsoft Canada Inc., where the court held that the otherwise enforceable termination provisions of a stock awards agreement were unenforceable because the employer did not specifically call the provisions to the employee’s attention. However, the court in Sewell has gone a bit further in suggesting that an employer may have a duty to explain the implications of the clause to the employee, not just bring it to their attention.
The decision in Sewell appears to follow a trend towards more employee-friendly decisions when it comes to assessing an employee’s entitlements on dismissal. Employers and employees alike will want to pay close attention to see how the case law develops, particularly if the appeal of Waksdale is allowed.
In the meantime, employers should take care to ensure that their employment agreements do not inadvertently violate the requirements of the ESA, and are expressly clear with respect to an employee’s entitlements on dismissal. Employees who have recently been dismissed should speak with a lawyer before signing off on a separation package, as any termination clauses they might have agreed to may no longer be binding.
By Brittany A. Taylor