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Jun 22, 2020

The Pendulum Swings Back

By Fiona Brown, Michael F. Horvat and Lorenzo Lisi

Employers have become accustomed to decisions by the courts concerning the enforceability of provisions in employment agreements limiting entitlements on termination to something less than common law (and often to minimum entitlements under provincial employment standards legislation). In particular, the idea that parties are in a position to negotiate, agree upon and execute an agreement setting out the terms and conditions of their employment has been replaced with a “post-game” review of technical compliance with the provisions of provincial employment standards legislation. In other words, even if the parties agree that they knew, understood and approved a provision, if it’s not technically perfect, it will be deemed unenforceable and will revert to common law.

Case law which sought to push the pendulum towards employers provided some hope. It appeared there was a move back to an interpretation of termination provisions which favoured employers as long as minimum standards were met. Even if the language wasn’t perfect, such provisions might still be enforceable and, in any event, if there is an offending provision, it could be “severable” from the rest of the contract.

However, the pendulum seems to have been pushed back towards an employee-friendly interpretation. On June 17, 2020, the Ontario Court of Appeal issued a disappointing and (for employers) concerning decision with respect to the enforceability of termination provisions and the issue of severability. In Waksdale v. Swegon North America Inc., 2020 ONCA 391 (“Waksdale”), the Court of Appeal determined that if one aspect of a termination provision, even if not relied upon by the employer, is determined to be in violation of the Employment Standards Act, 2000 (“ESA”), then all other aspects of the termination provisions could be struck down as unenforceable.

Here are the facts. After only 10 months of employment, the employer terminated the employee’s employment on a without cause basis. Notwithstanding the clear calculation of the appropriate notice required for a without cause termination set out in the employment contract which was negotiated and accepted by the parties, Mr. Waksdale brought an action for summary judgment arguing that the employer should not be able to enforce the restrictive termination provision. To be clear: the termination was not for cause, but rather on a without cause basis based on the language of the employment agreement.

At the motion for summary judgment, the employer conceded that the “for cause” provision included in the contract was in violation of the ESA, but argued that it should have no impact on the employer’s ability to rely upon the separate and distinct without cause notice provision, given that the employer was not terminating the employee for cause. In any event, the employer also argued that the severability clause should be able to “save” the separate lawful components from the “for cause” provision. The motion judge agreed with the employer and dismissed the employee’s action, stating:

[10]      … [the “with notice” provision] is a stand-alone clause, and is enforceable without reference to the Termination with Cause clause. Nothing further needs to be done to ‘save’ the Termination of Employment with Notice clause, as it is enforceable on its own express terms.

However, on appeal, the Ontario Court of Appeal overturned the summary judgment decision and held that, notwithstanding that the employer was not relying upon the for cause provision, its breach of the ESA affected the separate without cause provision and rendered the otherwise enforceable provision unenforceable. In their reasons, the unanimous court cited the recent trend in case law of courts carefully scrutinizing termination provisions:

[7]     The law regarding the interpretation of termination clauses in employment contracts was helpfully summarized by Laskin J.A. at para. 28 of Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, 134 O.R. (3d) 481. The following points from that summary are particularly apt for the purposes of this appeal:

  • The ESA is remedial legislation, intended to protect the interests of employees. Courts should thus favour an interpretation of the ESA that “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible”, over an interpretation that does not do so: Machtinger, p. 1003.
  • Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA. If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship: Machtinger, p. 1004.

In accordance with these reasons, the employer’s argument that the two termination clauses, applicable in different events, should be treated as separate and distinct was rejected. The Court stated that an employment agreement should not be read on such a “piecemeal basis”. Rather, the correct approach to follow is to consider whether the “termination” provisions, “as a whole”, were in violation of the ESA. Therefore, since one “termination” provision was illegal, all “termination” provisions in the agreement were declared unenforceable. The Court went on to say that the severability clause could not be used to save any lawful provisions that were struck down through this approach.

Takeaway For Employers:

The decision seems to entirely ignore the intent of the parties on the formation of the contract. Instead, the Court of Appeal sets an even higher bar where an employer relies on a provision which attempts to contract out of law (which is perfectly legal if done “properly”). In effect, the decision renders an otherwise enforceable restrictive covenant unenforceable and may have sounded the final death knell for reliance by employers of severability clauses in an employment contract.

The bottom line is this: all existing termination provisions in current employment agreements which limit termination/severance, and including an “offending” with cause termination provision, may now be in jeopardy. Most problematic for employers, and those who advise them, is that neither decision set out the reasons or provided an explanation as to why the with cause termination provision was deemed or considered offside the ESA. It leaves everyone in the dark and makes avoiding such a result in the future all the more difficult.

The Court of Appeal in the Waksdale decision has now expanded the basis for an attack on the enforceability of termination provisions which contract out of common law and could mean that any provision in violation of the ESA could “poison” otherwise enforceable provisions. This is a disturbing result which does not seem based on fact, but rather appears to work backwards from the result of getting the employee out of a contract which limits entitlement. In our view, it is a decision based on equity, not logic.

Where does that leave us? Employers need to be even more vigilant. Assess all termination provisions so they can now address compliance with the ESA. Review “with cause” termination provisions to integrate the “higher” standard under provincial employment standards legislation. And document all notes, discussions and correspondence relating to the formation of the contract. At some point, the hope is that the courts will pay more attention to the intent of the parties, rather than the slip of a pen.

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