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Employment Agreements and Termination Clauses: The Impact of Waksdale v Swegon North America Inc.

January 25, 2021

Authors: Rachel West and Mihai Beschea

The Ontario Court of Appeal released Waksdale v Swegon North America Inc on June 17, 2020 (“Waksdale”). The Supreme Court of Canada recently denied leave to appeal on January 14, 2021. This means that the Ontario Court of Appeal’s decision is the final word on this matter.  This is an important decision for employment law and has significant impacts on written employment agreements.

Mr. Waksdale sued his former employer for wrongful dismissal. He was 42-years old, his role was Director of Sales, and he had an annual income of about $200,000. He was employed for about 10-years when his employment was terminated. He was terminated without cause and was given 2-weeks’ pay in lieu of notice. There was a written employment agreement in place, which contained a problematic termination clause.

The termination clause was separated into two parts: “Termination for Cause” and “Termination of Employment with Notice [Without Cause].” The employer conceded that the “Termination for Cause” clause violated the Employment Standards Act, 2000 (“ESA”). The motions judge found that even though one part of the termination clause was void, the other part “Termination of Employment with Notice,” was not and therefore it was a stand-alone, unambiguous, and enforceable clause.

The Ontario Court of Appeal disagreed and overturned the motion judge’s decision. The employee was successful in proving his case for wrongful dismissal on appeal.

Important Points from the Court of Appeal’s Decision 

Two important points come out of the Court of Appeal’s decision:

  1. An employment agreement, including termination clauses, must be read as a whole and not on a piecemeal basis. The correct approach is to determine whether the termination provisions in an employment agreement read as a whole violate employment standards legislation. The court will not enforce termination provisions that are in whole or in part illegal.

Even if the employer is not relying on the illegal part of the termination clause, the court will still not enforce the termination clause as whole. There is a concern that the employer may gain a benefit from the illegal termination clause and, as such, the employer should be permitted to rely on.

  1. The value of severability clauses in employment contracts is decreased. The employment agreement contained a severability clause, which would remove provisions that offended employment standards legislation. The employer sought to rely on the severability clause to remove the illegal aspect of the termination provision. The Court refused to give effect to this argument. A severability clause cannot be used to give effect to clauses in a contract that have been made void by statute.

Implications for Employers

This decision has particularly important implications for employers. Termination clauses will be assessed as a whole, not in individual parts. If the termination clause is unenforceable or contains an unenforceable aspect, there is a significant risk that the termination clause will be thrown out. If an employer is hoping to use the termination clauses to limit notice entitlements to the legislated minimum, employers now risk paying common law notice requirements. Courts, at least in Ontario, will not sever illegal or unenforceable termination provisions.

This is a good time to ask your legal adviser to review employment agreements contracts and determine if they contain unenforceable clauses. Companies that seek to limit severance pay to the minimum standards under employment standards legislation are particularly vulnerable to attack.  Employers should review their employment agreements to ensure their termination provisions do not violate applicable employment standards legislation. 

As the Supreme Court of Canada recently denied leave to appeal, the Waksdale decision now has national implication. This case is binding on Ontario courts and is persuasive to courts in all other provinces. As minimum employment standards are always evolving, employers must be diligent to review employment contracts to ensure compliance and to avoid the risk of paying common law severance pay. In light of Waksdale, employers should be cautious when terminating employees – either with or without cause – and should consider speaking with a legal adviser to understand the risks.

“Just Cause” Termination in Ontario and Waksdale

The Court in Waksdale does not explicitly discuss why the employer conceded that the “Termination for Cause” provision violated the law. We suspect it is because Ontario has a unique legislative scheme for just cause dismissal.

Under sections 2(1) and 9(1) of Ontario’s Termination and Severance of Employment regulation, an employee is not entitled to notice of termination, termination pay, or severance pay where that employee was guilty of:

  1. wilful misconduct;
  2. disobedience; or
  3. wilful neglect of duty that is not trivial and has not been condoned by the employer.

This legislative scheme is designed to replace the common law framework for just cause dismissal and imposes a higher threshold to dismiss an employee with just cause. For instance, wilful misconduct involves the assessment of subjective intent and is colloquially referred to as “being bad on purpose.” On the other hand, just cause for dismissal, as defined by the common law, is a more objective standard with a lower threshold. Employees who are careless, thoughtless, or make mistakes through inadvertent conduct no matter how serious, will generally not meet the wilful misconduct standard. Put another way, there is a lower threshold to terminate an employee with cause under the common law than under Ontario’s ESA.

Employment contracts that provide fewer rights or protections than provincial employment standards legislation will be void and unenforceable. In Ontario, an employment agreement that contains the term “just cause” dismissal risks running afoul of Ontario’s ESA. Just cause is a broader standard than what is narrowly prescribed in the ESA, and employers cannot contract out of the ESA.

Turning back to Waksdale, we believe this is why the employer conceded that the “Termination without Notice” provision was invalid in their employment agreement. If an Ontario employment agreement uses the term “just cause” for termination without notice, the agreement prescribes lower protection for the employee than what is in the ESA. As such, a court will most likely find that termination provision void.  Consequently, there is an increased risk that common law damages for wrongful dismissal will be awarded.

Employment Agreements

If you are an Ontario employer, we recommend reviewing the company’s employment agreement to ensure the language is consistent with the ESA. The employment team at Carbert Waite LLP would be pleased to assist with a review of employment agreements in light of the Waksdale decision.

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