Ontario Court of Appeal Changes the law on Termination Clauses Again!

As an employment lawyer for employers, whenever a client asks whether they should have a contract in place for their employees, my answer is always “yes, absolutely!”.  While employment contracts are good for the parties to understand their rights and obligations in the relationship, they also contain important clauses which protect parties’ interests. One of the most important types of clauses in an employment contract is the termination clause.

There are typically two types of termination clauses: for cause and without cause. First, the “termination for cause” clause governs terminations in the case where an employee has conducted sufficiently inappropriate conduct irreparably harming the employment relationship, justifying the immediate termination of employment for “cause” without notice. Second, the “termination without cause” clause is utilized when an employer needs to terminate employment and does not have “cause” to do so, and must be done without notice of termination or pay in lieu of notice. For example, an employer who may have to restructure their organization may need to terminate several employees because they need to reduce the number of paid salaries to be profitable to continue the business.

Any termination clause must comply with the minimum standards required by the Ontario Employment Standards Act, 2000. Any clause that can be interpreted as providing something less than the minimum standard will be deemed by the Court to be void. This includes both the termination for cause and the termination without cause provision.  A recent decision, Waksdale v. Swegon North America Inc. [2020] O.J. No. 2703, held that because a termination for cause provision failed to comply with the minimum standards, the entire termination clause was unenforceable, including the termination for cause and the termination without cause provision.  As a result, the employer lost the protections of the contract, and was required to pay reasonable notice at common law which is significantly greater that the minimum standards.

The contract which was in front of the Courts contained both types of clauses, a “termination for cause” clause and a “termination without cause clause”. The employee conceded that the “termination without cause” clause was enforceable, and also that this particular employee had his employment terminated on a “without cause” basis.  The employer also conceded that the “with cause” clause was invalid, as it did not comply with the requirements of the Employment Standards Act (“ESA”). The Court was required to determine the specific issue of whether an illegal “termination for cause” clause rendered the “termination without cause” clause unenforceable.

The employer argued that there were two separate provisions in the employment agreement dealing with each type of termination and that the clauses should be read and considered separately. The Court of Appeal disagreed with the employer, instead the Court indicated the following:

“it is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are by their terms otherwise linked. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach…Further it is of no moment that the respondent did not rely on the Termination for Cause provision. The court is obliged to determine the enforceability of the termination provisions as at the time the agreement was executed; non-reliance on the illegal provision is irrelevant”.

The employer has appealed the decision to the Supreme Court of Canada. Since this decision has been released, it has already been applied within the Superior Court of Ontario in Swell v. Provincial Fruit Co. [2020] OJ No. 4024. Given that the earliest a decision can be delivered by the Supreme Court would likely be sometime in 2021, employers need to review their contracts to ensure that their “with cause” clauses comply with ESA requirements. If these clauses do not comply with the ESA and employers are forced to terminate employees in advance of a decision from the Supreme Court overturning the decision, they risk having to pay significant damages under the common law.

The material presented in this blog is to present general information on the subject matter and should not be regarded or relied upon as legal advice or opinion.