Employers: Double-check Your Termination Clauses

double check termination clause

If you thought the termination clauses in your employment contracts were air-tight, think again. The unsettled field of employment law strikes again in the Ontario Court of Appeal decision in Waksdale v Swegon North America Inc. 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 infringing section in the termination. 

To put this in context:

If you dismiss an employee without cause, and your termination without cause provision in the Employment Contract is perfectly enforceable, you may still be out of luck because your termination for cause provision is void – even though you are not dismissing them for cause. As a result, you may be liable for exponentially more severance than you think.

And although you may think that your severability clause will protect you, the court held that severability clauses cannot be used to “save” illegal clauses in a contract.

Background

The plaintiff was a 42-year-old Director of Sales with ten months of service with an Employment Agreement that included two separate termination clauses: “Termination of Employment with Notice” and “Termination for Cause”.

At termination, the plaintiff was provided with two weeks’ severance pay in accordance with his contract. He brought a motion for summary judgment seeking six months pay in lieu of notice pursuant to common law. He sought to avoid the consequences of his contract by asserting that the termination for cause clause breached the ESA and this nullified the entire agreement, or at the very least, both termination provisions. 

The plaintiff lost the motion, with the court holding 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.

At Appeal

The case went to the Ontario Court of Appeal, which overturned the motion judge’s decision. They found that:

  • If a part of a termination clause in an employment contract is invalid, then the entire termination clause will be void, even if:
    • The part that is being relied upon by the employer is otherwise valid
    • The termination provisions are distinct and separate in the employment agreement
  • Employee contracts should be interpreted in a way which “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible.
  • The enforceability of an employment contract must be determined at the time the agreement was executed. This means that the employer’s subsequent actions are irrelevant in this analysis. Even if their actions are compliant, an employment contract can be held unenforceable if its provisions contravene the ESA.
  • 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 in different sections.
  • A severability clause cannot be used to sever the offending part of the termination clause, especially where it has been made void by statute.

Further, in interpreting termination clauses, courts must recognize two important factors:

  1. The power imbalance between employees and employers
  2. The remedial protections offered by the ESA

Takeaways

This decision will have a dramatic impact. Employers and their counsel should be concerned, as the vast majority of termination for cause provisions will likely not withstand scrutiny. This will provide employees and their counsel with a new way to get around termination clauses in executed employment contracts.

As the field of employment law continues to evolve, one thing is clearer than ever: properly drafted contracts are crucial to protecting your business.

If you have any doubt about the validity of your employment contracts, it is vital that you speak to an employment lawyer. Our team is happy to help you understand your rights and obligations and will ensure that your termination clauses are unquestionably enforceable.

We will work proactively with you to put strong, enforceable contracts and policies in place that reduce your labour costs. If you are an individual, we will review any contract offer with you so that you understand the implications of signing. If you have been dismissed, we will provide the advice you need, including an assessment of whether any termination clauses you agreed to will be enforceable.