Employers across Ontario are double-checking their contracts since the Ontario Court of Appeal released its judgment in Waksdale v Swegon North America Inc., earlier this month. The court held that if an Employment Agreement contains a termination-with-cause provision that breaches the Employment Standards Act, 2000 (ESA), the termination-without-cause provision will be rendered unenforceable as well. This is true even if the employer was not relying on the for cause section and had proceeded on a without cause basis. Even a severability clause cannot save a provision in this context.
The plaintiff in Waksdale, a 42-year-old Director of Sales, was terminated without cause after 10 months at Swegon. The Employment Agreement signed by the plaintiff included two separate termination clauses: “Termination of Employment with Notice” and “Termination for Cause”.
The employee was earning around $200,000 a year in this position and was provided with two weeks’ severance pay plus his applicable car allowance in lieu of notice. This was considerably less than what he would have been entitled to at common law but is more than the bare minimum payable under the ESA.
As such, the employee brought a motion for summary judgment seeking six months’ pay in lieu of notice. While he was terminated under the former clause, he alleged that the termination clause’s illegality nullified the entire agreement, or at the very least, both termination provisions. In the lower court, the plaintiff relied upon the ruling in North v Metaswitch Networks Corporation, which laid out the circumstances under which an illegal termination clause can be severed:
“First, assess the termination clause to see whether there is any contracting out of an employment standard. If there is, then the termination clause is void, and there is nothing to which the severability clause can be applied.”
The employee’s counsel stressed that the ESA was remedial legislation, drafted to protect employees, and should be interpreted in this way. Courts have historically decided such cases so as to incentivize employer compliance with statute (Wood v Fred Deeley Imports Ltd.).
The employer argued that the case at hand was distinguishable from North due to the distinct termination clauses at play in this case. They relied upon Khasaba v Procom Consultants Group Ltd., where the court ruled that one illegal clause does not void the entire employment agreement, leaving the remaining clauses enforceable.
The motion judge, Justice Edward Morgan, agreed and held that the Termination of Employment with Notice clause was an enforceable stand-alone clause and there was no severance clause required to save the rest of the agreement.
The case went to the Ontario Court of Appeal, which overturned the motion judge’s decision. Leaning heavily on Justice Laskin’s judgment in Wood v Fred Deeley Imports, the court confirmed that interpretation which “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible” should be favoured.
The court also takes from Wood that “the enforceability of a termination provision in an employment contract must be determined as at the time the agreement was executed.” This means that the actions of the employer subsequent to drafting the contract are irrelevant in its interpretation. Even if their actions are compliant, an employment contract can be held unenforceable if its provisions contravene the ESA.
While it was clear that the employer would not be able to rely upon the Termination for Cause provision, it was also held that this fact rendered both termination clauses invalid and unenforceable. This is because employment agreements “must be interpreted as a whole and not on a piecemeal basis”. The two termination provisions are to be understood together, even if they are in different sections of the agreement.
The employer then attempted to rely upon the severability clause in the agreement. However, as per North, a severability clause cannot be used to sever the offending part of the termination clause, especially where it has been made void by statute. Therefore, where termination clauses are found to be contrary to statute, a severability clause cannot be used to ‘save’ them.
Further, in interpreting termination clauses, courts must recognise two important factors:
- The power imbalance between employees and employers
- The remedial protections offered by the ESA
This decision reinforces the remedial nature of the ESA in its application to employment contracts. Employers and their counsel should be concerned, as the vast majority of termination for cause provisions are likely inconsistent with the ESA, and will therefore invalidate any termination without cause provision in the same contract. This will provide employees and their counsel with a new way to get around termination clauses in executed employment contracts.
By Stuart Rudner and Summer Law Student, Ayesha Adamjee