Ontario Court of Appeal Terminates another Termination Clause

The Ontario Court of Appeal has ruled that another termination clause in an employment contract is unenforceable.  In Waksdale v. Swegon North America Inc., the Court was asked to determine the legal impact of an illegal termination for cause provision on an otherwise enforceable termination without cause provision. The Employer admitted that the “with cause” termination provision was unenforceable, but argued that the provision had no bearing on the case since it was a termination without cause.

The case does not provide any information as to the specific reasons why the for cause provision was unlawful, but it could be that the provision failed to address the concept of “willful misconduct” which is necessary under the Ontario Employment Standards Act, 2000 (“ESA”), to avoid statutory termination pay and severance pay, which represents a higher standard than just cause under the common law.

The motion judge dismissed a motion for summary judgment by the employee on the basis that the termination without cause provision in the employment agreement was a standalone, unambiguous, and enforceable clause, which provided as follows:

You agree that in the event that your employment is terminated without cause, you shall receive one week notice or pay in lieu of such notice in addition to the minimum notice or pay in lieu of such notice and statutory severance pay as may be required under the Employment Standards Act 2000 as amended. All reimbursement for business expenses shall cease as of the date of termination of your employment, however, you shall be reimbursed for legitimate business expenses that have been incurred and submitted to the Company but not as yet paid you to that date. The terms of this section shall continue to apply notwithstanding any changes hereafter to the terms of your employment, including, but not limited to, your job title, duties and responsibilities, reporting structure, responsibilities, compensation or benefits.

There was no dispute that the Employer complied with the ESA and the above termination without cause provision by providing the employee with 2 weeks’ pay in lieu of notice. He had been employed for less than a year.   The difficulty for this Employer was that the termination for cause provision was illegal.  The Court was asked to consider whether the illegality of the termination for cause provision invalidated the termination without cause provision.

The Employer argued that where there are two discrete termination provisions that apply to two different situations and that in this case, the termination for cause provision was not applicable.  The Employer argued that Courts should consider whether one provision impacts the other and determine if they are entangled in any manner – if not, the Employer argued that there is no reason why the invalidity of one clause should impact on the enforceability of the other.

The Court of Appeal rejected the argument. It held that the contract must be read as a whole, and not on a piecemeal basis.  According to the Court of Appeal, the correct approach is to look at the termination provisions as a whole to determine if they violate the ESA irrespective of the actual circumstances of the termination.  It did not matter that the Employer did not rely on the termination for cause provision because the Court had to determine the enforceability of the provisions at the time the contract was executed, not at the time of the termination.

The Employer also argued that the severability clause ought to be applied to “sever” the illegal clause from the contract. The provision provided:

You agree that if any covenant, term, condition or provision of this letter outlining the offer of employment with the Company is found to be invalid, illegal or incapable of being enforced by a rule of law or public policy, all remaining covenants, terms, conditions and provisions shall be considered severable and shall remain in full force and effect.

The Court of Appeal rejected this argument also, and held that the severability clause does not have any effect on clauses of a contract that have been made void by statute and in light of the findings that  the entire agreement must be considered as a whole to determine its enforceability.

In our view, the Court of Appeal decision is flawed and open to challenge to the Supreme Court of Canada. To ignore the actual circumstances surrounding the termination seems to ignore an important contextual element that ought to have some bearing on the analysis.  In this case, the severability clause could have been given effect to reflect the fact that the illegal clause was not applicable to the facts before the Court. If a clause has no application to the circumstances before the Court, it is an odd result that an otherwise enforceable, clearly drafted, termination without cause provision should be set aside as invalid.

In a recent decision from the Ontario Superior Court, Alarashi v. Big Brothers, the Court noted that the “with cause” termination that had no applicability to the circumstances before the Court since the employee was terminated without cause and the provision did not apply in the context of that specific termination. In this case, the Superior Court reviewed the termination for cause language and held that it was enforceable. Ultimately, the termination without clause in this case was also deemed to be unlawful because it provided for termination pay or severance pay. The ESA provides that in certain cases an employee may be entitled to both termination pay and severance pay, so that clause could be applied in a manner that excluded one of termination pay or severance pay and was, therefore, unenforceable. The Court noted that it should not strain to find ambiguity capable of invalidating a termination clause if there is no ambiguity to be found.

Employers must draft termination clauses with tremendous caution and precision. Any and all ambiguity will be resolved in favour of the employee which could render termination provisions in employment agreements unenforceable. Based on this decision from the Court of Appeal, Employers should review the entire termination provision in employment agreements, including both the termination for cause language and termination without cause language, with a view to ensuring compliance with the ESA viewed as a whole.  This decision may be appealed by the Employer to the Supreme Court of Canada. We will keep you up-to-date if there are any additional developments.