In early July I advised you of a very significant decision of the Ontario Court of Appeal (OCA) in Waksdale v Swegon North America Inc., dealing with the termination of employment terms of employment contracts.
The employer applied to the Supreme Court of Canada (SCC) for leave of the Supreme Court to appeal the OCA decision. On January 14th, 2021, an application to appeal the decision was dismissed by the Supreme Court of Canada with costs.
There are important implications in this decision for Ontario employers.
I have included the Overview and Summary of the case from July at the bottom of this post.
In short, the OCA held, and the SCC upheld, that the “termination for cause” term of an employment contract must comply with the Employment Standards Act threshold that an employee must have engaged in “willful” misconduct, in order to be terminated without pay.
If the “termination for cause” clause does not comply with the ESA, the entire termination provisions of an employment contract could be invalid.
In my experience, currently most “termination for cause” terms of employment contracts do not contain the required language to meet the Employment Standards Act threshold.
In addition to the termination terms of employment contracts, the COVID-19 pandemic has prompted the need for many employers to temporarily lay employees off during the pandemic. I am recommending that employers amend their employment contracts to include a term that provides for the employer to be able to temporarily lay the employee off.
Given these two important developments in regard to employment contracts, I am recommending that you have your employment contracts reviewed and amended.
SUMMARY FROM JULY 6
A decision by the Ontario Court of Appeal on June 17 could have significant impact on Employment Agreements in Ontario and the enforceability of termination clauses in those agreements.
I have provided a summary and analysis below. Please contact me if you have any questions about your Employment Agreements and how this judgment could affect them.Overview
The core of the case, Waksdale v. Swegon North America Inc., centres around two termination provisions within the same employer agreement, one a “Termination for Cause” (“For Cause”) and the other a ‘Termination of Employment with Notice’(“With Notice”).
It is not uncommon for agreements to contain both of these provisions, and you may have agreements composed in this way.
The issue in this case was that the provision “For Cause” was contrary to the requirements of the Employment Standards Act, 2000 (“ESA”). The court ruled that if any termination provision in the employment agreement is contrary to the requirements of the ESA, then all termination provisions in the employment contract will be considered unenforceable.
Further, this judgment was made even though the employment contract also contained a severability clause. The Ontario Court of Appeal ruled that a severability clause cannot be utilized to sever the offending term of the termination provisions and thereby save the remaining terms of the employment contract.Summary
Mr. Waksdale was employed as Director of Sales at Swegon with compensation of approximately $200,000 per year.
Among other provisions, his Employment Agreement contained these separate provisions:a “Termination for Cause” provision. It is important to note that the employer conceded that this provision was not compliant with the ESA;a “Termination of Employment with Notice” provision, which provided that, upon termination “without cause” Mr. Waksdale would receive one week of notice or pay in lieu of notice, in addition to the minimum notice or pay in lieu of notice and statutory severance pay required by the ESA; and a “severability” provision, which would make any illegal clause (i.e. the “For Cause” provision) severable from the remainder of the Employment Agreement.Mr. Waksdale’s employment was terminated by Swegon after eight months on a “without cause” basis. Mr. Waksdale was provided his entitlements in accordance with the “With Notice” provision of his Employment Agreement.
Mr. Waksdale sued for wrongful dismissal. He argued that he had not been provided reasonable notice of dismissal, claimed six months’ pay in lieu of notice at common law, and moved for summary judgment, which was heard by the Ontario Superior Court of Justice.Superior Court DecisionThe Superior Court Judge concluded that the “With Notice” term was a stand-alone, unambiguous, and enforceable term of the Employment Agreement.
He stated further that there was no need to sever anything because the ‘With Notice” provision was used to terminate the employee and thus the “For Cause” provision did not apply.
Mr. Waksdale appealed his case to the Court of Appeal.
He argued that the defective “For Cause” provision rendered the entire employment agreement, or at least both of its termination provisions, void and unenforceable. His position was based on a prior precedent from the Court of Appeal that dealt with the interpretation of employment contracts.
The employer, while acknowledging that the “For Cause” provision was contrary to the ESA, argued that it could rely on the “With Notice” provision because the provision was valid and because the employer was not alleging cause.Decision of the Court of Appeal for Ontario
The Court of Appeal disagreed with the motion judge. It concluded that the “With Notice” clause was unenforceable due to the inclusion of the faulty “With Cause” provision within the agreement and that an employment agreement needs to be taken as a whole.
The court set aside the motion judge’s order, allowed the appeal, and ordered the matter remitted to the motion judge to determine the quantum of Mr. Waksdale’s damages.
In the decision, the Judge wrote:
An employment agreement must be interpreted as a whole and not on a piecemeal basis.
The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA.
Recognizing the power imbalance between employees and employers, as well as the remedial protections offered by the ESA, courts should focus on whether the employer has, in restricting an employee’s common law rights on termination, violated the employee’s ESA rights.
While courts will permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal.
In conducting this analysis, 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 without regard to their combined effect.
Further, it is of no moment that the respondent ultimately did not rely on the [“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.
This judgment makes it clear that it is of vital importance that each term or provision in any Employment Contract be in compliance with the ESA.