The law on termination clauses in employment contracts continues to evolve. In recent years, the movement of this area of law has been towards the side of employees, with many termination clauses being found to be unenforceable.
One of the most significant cases on termination clauses in recent years was the June, 2020 decision in Waksdale v. Swegon North America Inc. in which the Court of Appeal found that a “termination for cause” section in an employment contract that uses a “just cause” standard invalidates the entire termination clause, including the “termination without cause” section. This has caused a significant number of termination clauses to be found unenforceable, and there are countless more that would fail if challenged. You can read more about the Waksdale decision here.
As discussed below, in September 2021, the Ontario Superior Court of Justice released a decision in Rahman v. Cannon Design Architecture Inc. that appeared to be a win for the employer. Despite containing similar language to the termination clause in Waksdale, the Court found that the termination clause in Rahman was valid and enforceable, in part due to the employee’s sophistication and the subjective intent of the parties. This directly contradicted several other cases. A few days ago, the Ontario Court of Appeal overturned the lower court’s decision in Rahman and found that the termination clause was unenforceable.
The Superior Court of Justice Decision
As Stuart wrote about last September, the decision in Rahman was a surprising win for the employer on the issue of the enforceability of termination clauses. In Rahman, Justice Dunphy found the following:
“ I cannot agree that Ojo represents a conclusive and binding determination that the general phrase ‘conduct that constitutes just cause for summary dismissal’ must in every contract and in every context be construed as authorizing dismissal in circumstances that would contravene the ESA [Employment Standards Act] and the regulations thereunder.
“ There is no basis to apply a strict or even adverse construction approach to the termination provisions of this employment contract in the context of this case where:
“a. the termination provisions were the object of specific negotiation with the benefit of time and independent legal advice between reasonably sophisticated parties with neither compulsion nor marked disparity in bargaining power;
“b. the negotiations resulted in material improvements for the benefit of the prospective employee in excess of ESA minima; and
“c. the offer letter contains an explicit ‘for greater certainty clause’ recognizing that the employer’s ‘maximum liability… for common law notice, termination pay, benefits continuation, severance pay, or payment in lieu of notice’ shall be limited to the greater of the notice required in the Officer’s Agreement or the minimum amounts specified in the ESA.
Justice Dunphy found that the termination clause was enforceable and limited the employee’s entitlements on dismissal to the minimum notice requirements under the ESA. In coming to this conclusion, Justice Dunphy relied on the following:
- The fact that the employee was represented by counsel in the negotiations about the employment contract;
- the finding that the employee was a “woman of experience and sophistication”; and
- the subjective intention of the parties to comply with the Employment Standards Act, 2000 (the “ESA”),
The Court of Appeal Decision
When the lower court’s decision in Rahman was released last September, Stuart predicted that it would be overturned on appeal. That is exactly what has now happened.
On June 8, 2022, the Ontario Court of Appeal released its decision on the appeal of Rahman. In overturning the lower court decision, the Court of Appeal found that,
“the motion judge erred in law when he allowed considerations of Ms. Rahman’s sophistication and access to independent legal advice, coupled with the parties’ subjective intention to not contravene the ESA, to override the plain language in the termination provisions in the Employment Contracts. By allowing subjective considerations to distort and override the wording of those provisions, the motion judge committed an extricable error of law”.
In its further analysis of the termination clause, the Court of Appeal found the following:
“the Operative Just Cause Provision gives [the Employer] the right to terminate Ms. Rahman’s employment without notice or payment, for conduct that constitutes just cause alone. That means the Operative Just Clause Provision contravenes the ESA and s. 5 renders it void. Section 5 provides that no employer shall contract out of an employment standard and any such contracting out is void.
“This court has repeatedly held that if a termination provision in an employment contract violates the ESA – such as a “no notice if just cause” provision – all the termination provisions in the contract are invalid. […] The invalidity of the just cause provision rendered the other termination provisions unenforceable.
“Accordingly, the termination provisions in the Employment Contracts are void”.
The Court of Appeal’s decision is consistent with Waksdale, and it reaffirms that an employee’s sophistication and independent legal advice will not affect whether a termination clause is enforceable or not.
The main takeaway is that a termination clause either violates the ESA or it doesn’t – this analysis is based on the language of the clause itself and does not change depending on the sophistication of the employee or their representation by counsel.
We will continue to monitor the developments in this area of law. For now, the pendulum remains on the side of employees.
If you are an employer, we can help you implement a contractual termination clause that will effectively limit your severance obligations. If you are an employee, your entitlements on dismissal might be greater than what is spelled out in your employment contract. If you have any questions about your situation or if you would like to get legal advice, please feel free to contact us.