Enforceable termination clauses are one of the best benefits an employer can get out of entering into a written employment agreement with an employee. While an employer likely hopes that they’ll never have to terminate an employee, that won’t likely be the reality for any longstanding business. Making sure you’ve got a proper termination provision in place will help an employer plan for the costs and risks associated with terminating an employee, and can help to avoid costly wrongful dismissal claims. So where do employers stand with their termination clauses as we go into 2023?
Important developments in 2022
With a little less than two months lefts in 2022, many employment lawyers may be reflecting on some of the key employment law decisions we’ve seen this year and trying to settle on which of them will have the most direct and long-lasting consequences for their practices and the advice they provide to employers. What, in essence, is the most important employment law decision of the year?
Two prime contenders flow from and are spiritual successors to the Ontario Court of Appeal’s 2020 decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391 (CanLII). If you’re an employer and you’re already familiar with the Waksdale decision then it probably means that you weren’t receiving good news. Waksdale has been the bane of many employers’ existence over the last two and a half years. The Court’s ruling in Waksdale, that an entire termination provision in an employment agreement was unenforceable as a result of the “termination for cause” section being deemed an attempt to contract out of the Employment Standards Act (“ESA”), has undone a great many termination provisions in the province. This, in turn, has resulted in employers owing terminated employees much more than the ESA minimum entitlements they were expecting to have to pay – in some cases, leaving employers on the hook for months or years more pay.
So what are those two cases? Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451 (CanLII) was an important Ontario Court of Appeal decision from earlier this year that followed Waksdale and expanded upon it by stating that the employee’s level of sophistication, the fact that the employee received independent legal advice, and the subjective intentions of the parties are all factors that won’t save a termination provision that, on its face, attempts to contract out of the ESA. Our firm has written about the Rahman decision extensively and you can find previous blog posts at the following links: Rahman v. Cannon Part I and Part II.
The second key decision and the one most likely to have long-lasting implications for employers, is the Ontario Superior Court of Justice’s ruling in Henderson v. Slavkin et al., 2022 ONSC 2964 (CanLII). In brief, Henderson concerned a long-term employee of a dental practice who had been provided with a new employment agreement in 2015. The owners of the dental practice set out to enter into written agreements with all of their employees because the owners were nearing retirement and were hoping to limit their termination obligations when they eventually closed their practice. The new agreement signed by Ms. Henderson included a termination provision that sought to limit her to her ESA entitlements on termination. Outside of the main termination provision, however, the employment agreement included conflict of interest and confidentiality clauses that stated that Ms. Henderson could be terminated for cause without notice, or compensation in lieu of notice, if she breached them. The court found these provisions to be attempts to contract out of the ESA and found the main termination clause to be unenforceable as a result.
Where Waksdale declared open season on termination provisions, and where Rahman expanded upon it by showing that factors specific to the employee can’t fix an otherwise broken termination provision, Henderson has now stretched the principles of these cases even further by showing that any termination-related provision found anywhere else in an employment agreement can invalidate an otherwise enforceable termination provision.
So what does this mean for employers?
Employers have had a tough time trying to enforce termination provisions over the last couple of years. The courts have never been fond of having their ability to assess reasonable notice eliminated by contract, and they typically will not hesitate to invalidate a termination provision that has not been properly drafted. Whereas the Waksale decision has shown that employers need to take great care with exactly how their termination provisions are prepared, Henderson confirms that the same level of care needs to be applied to the entirety of an employment agreement and any schedules that may be attached to it. Any termination-related provision in any part of a contract must be prepared in such a way to ensure that it will not be seen as an attempt to contract out of the ESA. It is not likely that there is any way to salvage a failure to do so, and a misstep later in a contract could undo an otherwise perfectly drafted termination clause.
- Review the termination provisions in their existing contracts with an employment lawyer;
- Make sure the review extends to any termination-related provisions that may be housed anywhere else in the agreement;
- Avoid attaching schedules (such as broader confidentiality or non-solicit agreements) to an employment contract if they have not been fully reviewed by an employment lawyer; and
- Consider whether any of the extra termination-related provisions are necessary in the first place.
Many employers went to great expense following the decision in Waksdale to update the termination provisions in their contracts. All that work will be for naught if something else buried in your agreement undoes that termination provision. The Henderson decision has only been out for three months and we are already seeing (especially on executive contract reviews) post-Waksdale employment agreements that will fail to be enforceable due to draconian termination provisions buried in other parts of the agreement. You can bet that employee-side legal counsel will be taking the time to scrutinize entire employment agreements for ways to undo an otherwise Waksdale-compliant termination clause. Employers will be far further ahead if they take the time to review their existing agreements with counsel now, especially before pulling the trigger on a termination.
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