A MAJOR NEW COURT OF APPEAL DECISION MEANS MANY TERMINATION CLAUSES ARE NOW UNENFORCEABLE

On June 17, 2020, the Ontario Court of Appeal (“ONCA”) released a new decision on the enforceability of termination clauses, which has significant implications for employers, as it will likely render termination clauses in many existing employment agreements unenforceable.

Termination clause enforceability is a legal issue on which court rulings have frequently swung back and forth over the past decade. In recent years, the pendulum had been swinging toward more liberal definitions of enforceability, to the benefit of employers. However, with this latest decision, the pendulum has swung all the way back to an approach strongly favourable to employees, making it much less likely that termination clauses will be deemed enforceable.

Importantly, this recent decision comes from the top court in Ontario, which makes it binding on all other courts in the province and supersedes all earlier decisions by lower courts that are inconsistent with this decision.

Background: Termination Clauses and Termination Entitlements

Termination clauses are provisions in an employment contract which set out an employee’s entitlements on termination of their employment.

Under the common law (the body of law made by judges), when employees are dismissed without cause, they are entitled to reasonable notice of termination of their employment, or pay in lieu thereof. In the absence of a termination clause, an employee is entitled to reasonable notice of the termination of their employment under the common law. Common law notice entitlements are usually considerably greater than the minimum entitlements under the Employment Standards Act, 2000 [ESA], and thus generally are significantly more costly for employers.

Employers may contract out of the obligation to provide common law reasonable notice. To do so, they must include a termination clause in the employment contract that limits the employee’s entitlements upon termination to the minimum entitlements required under ESA, or to some other specified amount that is greater than the ESA minimums. The ESA minimum entitlements include notice or pay in lieu of notice, severance pay (in some circumstances), and continuation of pension, health and other benefits.

However, termination clauses that provide for less than the minimum standards prescribed by the ESA are deemed void, resulting in employees whose contracts include these void clauses becoming entitled to the much higher common law notice entitlements despite the existence of the termination clauses.

Importantly, even if an employee’s employment is terminated for just cause, the employee is still entitled to their statutory termination notice under the ESA unless their misconduct meets the generally higher standard set out in the ESA of “willful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer”. A 2018 Ontario Superior Court of Justice (“ONSC”) decision found that a termination clause violated the ESA because it provided for termination without notice or pay in lieu of notice for employee misconduct which only rose to the level of just cause, and not to the higher standard of “willful misconduct” set out in the ESA. For more information on this lower court decision, please see our earlier article.

Over the years, the courts have established many principles and factors to consider in interpreting whether a termination clause provides for all of the minimum standards required by the ESA and whether the clause is therefore enforceable. The clause does not always need to explicitly mention that all ESA entitlements will be provided, but it must not state or imply in any way that they will not be provided.

The Lower Court Decision

In Waksdale v Swegon North America Inc [Waksdale], Mr. Waksdale was dismissed on a “without cause” basis after eight months of employment. His employment agreement contained two separate termination provisions: a Without Cause Provision and a With Cause Provision.

The case was first heard by the ONSC, which found that Mr. Waksdale was not entitled to common law reasonable notice, despite that the With Cause Provision was unenforceable for violating the ESA. Mr. Waksdale’s employment agreement contained a separate Without Cause Provision that complied with the ESA. The ONSC held that the With Cause Provision was not relevant in the circumstances, since Mr. Waksdale’s employment was terminated without cause, and the fact that the With Cause Provision did not comply with the ESA was not relevant. As such, the court held that the Without Cause applied and was enforceable on its own express terms. Mr. Waksdale was therefore only entitled to two weeks of termination pay pursuant to the Without Cause Provision in his employment agreement.

The ONSC held that, where an employment agreement contains multiple “stand-alone” termination clauses or provisions, such as a provision dealing with termination for cause and a separate provision dealing with termination on a without cause basis, the fact that one clause is unenforceable for violating the ESA’s minimum standards does not affect the validity of the other clause. Essentially, if the clause that directly applies to the employee’s situation (i.e. the without cause provision in the case of a without cause termination) complies with legal requirements and is separate, then it is irrelevant if clauses providing for termination in different circumstances are enforceable or not, and the applicable termination clause will be upheld. This judgment affirmed another decision by the ONSC, Khashaba v Procom Consultant Group Ltd. [Khashaba]. Please see our earlier articles for further discussion about the ONSC Waksdale decision and the Khashaba decision.

The Decision on Appeal

The Waksdale case was appealed to the ONCA, which overturned the lower court’s decision. The ONCA found that an employment agreement must be read as a whole, and that, as a result, the Without Cause Provision and the With Cause Provision had to be considered together. The Court ruled that if one of the two termination provisions is invalid, this will render the other termination clause invalid and unenforceable as well, because they must be considered as a whole. This is the case even if the two termination provisions are completely separate and located in different places within the employment contract.

The ONCA further held that the severability clause included at the end of an employment contract did not apply. Severability clauses generally state that if a provision in the contract is deemed to be void and unenforceable, they will be considered to be severed from the contract and the rest of the contract’s provisions will stand. The ONCA in Waksdale held that a severability clause cannot apply to sever the problematic “portion” of the termination provisions from the portion that would otherwise be enforceable, even if the termination provisions are drafted as separate clauses.

Therefore, both termination clauses in Mr. Waksdale’s employment contract were deemed unenforceable, and the ONCA ordered that Mr. Waksdale was entitled to common law reasonable notice despite that the Without Cause Provision in his contract itself complied with the ESA.

Implications for Employers

Waksdale overturns a number of lower court decisions on enforceability and severability of termination clauses from the past few years. While it is possible that this decision will be appealed to the Supreme Court of Canada (“SCC”), the highest court in the country, given its significance for employment relationships, there are a number of obstacles to this appeal (such as cost, and the fact that the SCC must decide the case is significant enough to be heard, which is rare). As a result, it is likely that this decision will remain the law in Ontario, binding on all other courts in the province.

Until this decision was released on June 17, 2020, an employee could be dismissed without cause, and have their termination entitlements limited to what was provided for in a valid “without cause” termination provision, even if the employment contract also contained an invalid “just cause” provision. Now, in such a situation, the “without cause” provision would be deemed unenforceable as well, and the employee would be entitled to the much greater common law reasonable notice period.

Notably, the employer in Waksdale had conceded that its “just cause” provision breached the ESA and was therefore unenforceable, so the ONCA did not need to interpret whether the “just cause” clause complied with the ESA. In fact, to date, the ONCA has not specifically ruled on what type of language is required in a “just cause” termination provision for the provision to comply with the ESA. As such, there is still room for interpretation about when a “just cause” termination clause is enforceable. Nevertheless, the ONSC has in the past two years interpreted these types of provisions and has held that the type of language present in most “just cause” provisions in employment contracts in Ontario is unenforceable. As a result, following the ONCA’s Waksdale decision, it is likely that Ontario’s courts will, in future cases, refuse to enforce the without cause termination provisions in many employment contracts because of the language of the “just cause” provision.

Furthermore, this decision changes the existing approach to severability in employment agreements because of the interpretation that provisions dealing with different types of terminations must be considered as one clause. In our respectful view, this new decision does not reflect an accurate application of the concept of severability, as it is contrary to longstanding principles established through caselaw. Nevertheless, because this approach was employed by the ONCA, it is now the binding law in Ontario, and this approach to severability will be followed by Ontario’s courts in the context of termination provisions going forward.

Most employers, particularly those whose employment contracts are more than approximately two years old, now face a serious risk that their termination clauses would be deemed unenforceable. Employers should seek legal advice to have their termination clauses reviewed as necessary to eliminate any risks that their “just cause” provisions, which had minimal relevance before this decision, will now render the “without cause” termination provisions in their employment contracts unenforceable.

This change in the law is particularly significant in the context of the recession that has been caused by COVID-19, as many employers will have to make many difficult termination decisions for economic reasons in the coming weeks and months.

Employers should be proactive in having their termination clauses reviewed and, where they are now unenforceable, should consider entering into new employment agreements with their employees as soon as possible in order to avoid the significant costs associated with common law notice entitlements for future terminations. In doing so, however, employers should be mindful of the fact that simply asking an employee to sign a new employment contract is not enough. Unless certain technical legal requirements are met when the employees sign the new contracts, the contracts will be entirely unenforceable for other reasons—which would lead to the same result of employees being entitled to common law reasonable notice despite the termination provisions.

For more information or assistance in reviewing your existing employment agreements and/or in strategically implementing new and enforceable employment agreements in your workplace, contact our lawyers.