Ontario Employers Face Sweeping Implications for the Enforceability of Termination Clauses

June 23, 2020

Written By Talia Bregman, Carl Cunningham and David Bushuev

Ontario employers, already grappling with the challenges of managing employee costs during the COVID-19 pandemic, now face the burden of an Ontario Court of Appeal decision that could materially increase many employers' severance cost obligations.

In Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Court of Appeal for Ontario ruled that an unenforceable "for cause" termination clause in an employee's employment agreement rendered unenforceable the entire termination provision (which included the “without cause” clause, rebutting common law). This decision is one of the more noteworthy Ontario employment decisions in several years as it has the potential to render “standard” termination provisions in many employment agreements unenforceable, thereby permitting employees to claim reasonable notice at common law and significantly increasing the severance obligations of Ontario employers. Ontario employers should immediately undertake a review, or have such a review conducted, of their employment agreements to determine whether they are affected by the Waksdale decision.

Background

In 2018, Swegon North American Inc. terminated Benjamin Waksdale and paid him two weeks' severance as per the formula in the “termination without cause” provision in Waksdale’s employment agreement. In response, Waksdale sued Swegon, seeking six months' notice at common law for his eight months of service.

Although Waksdale acknowledged the termination without cause provision in his employment agreement was lawful, he argued that the stand-alone termination for cause clause was unenforceable for violating Ontario's Employment Standards Act, 2000 (ESA). This, in turn, meant the without cause termination provision was unenforceable as well. Without an enforceable termination provision limiting an employee's severance entitlements, an employee will be entitled to reasonable notice at common law if dismissed without cause. Generally speaking, common law notice far exceeds statutory minimums and ranges between 1 to 24 months' notice (or all compensation in lieu), based on factors such as the employee's length of service, age and character of employment.

In response, Swegon conceded that the just cause provision was void for violating the ESA, but argued it was not relevant because Waksdale was terminated without cause. In the alternative, Swegon pointed to the "severability clause" in Waksdale’s employment agreement, which essentially makes any illegal clause (i.e., the separate just cause provision in this case) severable from the rest.

Main Issue

The principal issue the courts had to grapple with was whether the unenforceability of one termination clause could render a separate and otherwise lawful termination provision unenforceable, despite a clear severability clause.

The lower court answered "no", noting that the just cause provision was a stand-alone provision that was not relevant to the analysis as Waksdale was terminated without cause. However, the Ontario Court of Appeal took a very different view and overturned the lower court's decision.

The Ontario Court of Appeal Decision

In its decision, the Court of Appeal reasoned that:

1. An "employment agreement must be interpreted as a whole and not on a piecemeal basis." Accordingly, all of the termination provisions, regardless of whether found in one or more places in an employment agreement, must be read together. If any element of the termination provision violates the ESA, all other parts of the termination provision are unenforceable. Because the termination for cause provision in Waksdale’s employment agreement was void for violating the ESA, so too was the termination without cause provision unenforceable.
2. It does not matter if an employer does not rely on an unenforceable termination provision at the time of termination; rather, the enforceability of termination provisions needs to be assessed at the time an employment agreement was formed and cannot be saved if the employer provides the employee with, at a minimum, their statutory entitlements upon termination. In this case, it was not relevant that Swegon did not rely on the just cause provision when it terminated Waksdale.
3. The severability clause was of no use to Swegon here as a "severability clause cannot have any effect on clauses of a contract that have been made void by statute," and because the termination provisions were to be read together: the "severability clause cannot apply to sever the offending portion of the termination provisions."

In the end, the Court of Appeal agreed with Waksdale that he was entitled to common law notice, the length and quantum of which remains to be determined by the lower court (but which will certainly exceed the two weeks' severance pay Waksdale would have been entitled to under the without cause termination provision in his employment agreement).

We will continue to monitor this case and provide any updates.

Key Takeaways for Employers

Ontario employers should act now to review their employment agreements. With the particular significance of termination clauses in this period of economic uncertainty, it is important for employers to know whether their contractual termination provisions continue to be enforceable. The Waksdale decision could materially increase employers’ potential severance costs.

We suggest starting with a comprehensive review of template employment agreements to look out for the following:

• An unenforceable “just cause” or “for cause” termination provision could result in an otherwise enforceable without cause termination provision being found unenforceable:The decision in Waksdale is an important reminder that employers in Ontario must ensure the entire termination provision in their non-unionized employees' contracts are enforceable as being compliant with the ESA. In recent years, the focus has been on the precise language of an employer's without cause termination provision to ensure the provision did not provide for less than ESA minimums, but this decision reminds employers to also carefully review for cause provisions as well as the resignation provisions.
  
  Although the just case provision at issue in Waksdale was not reproduced in the courts' decisions, a just cause provision that stipulates something along the lines of "if you are terminated for cause, you will not be entitled to payments of any kind", is likely offside the ESA and therefore unenforceable.

If your company's termination provisions are vulnerable to this type of challenge, you may want to consider remedying the issue by:

• Using pay increases or other forms of fresh consideration to engage with current employees to sign new employment agreements with enforceable termination provisions. In Ontario, generally an employer cannot require employees to sign new employment agreements as a condition of continued employment. Rather, employers need to offer employees something new as consideration for a new agreement. To remedy enforceability issues in current employment agreements, employers should consider using pay increases, promotions, signing bonuses or some other new incentive as an opportunity to engage with employees to sign new employment agreements with enforceable termination provisions.

Moving forward, we suggest that:

• Employers should regularly review and update their standard employment agreements:The decision in Waksdale comes at a time of economic uncertainty. Having enforceable termination provisions can provide greater certainty and limit severance costs, which can be significant, especially when dealing with broader terminations or terminations of management-level employees.Employment law is constantly evolving and we recommend that employers review their employment agreements at least annually with the assistance of legal counsel, and update them if necessary.

If you have any questions arising out of the matters reviewed above, or require assistance in respect of your employment agreements, please contact the Bennett Jones Employment Services group.

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