Ontario Court of Appeal Renders Another Blow To the Enforceability of Employment Contracts in Ontario
As if employers didn’t have enough to contend with already.
Last month, the Ontario Court of Appeal rendered a decision that can be described as startling, shocking and groundbreaking (Waksdale v. Swegon North America Inc.). It will serve to nullify or invalidate the majority of the termination provisions contained in employment contracts that are now, arguably, void or illegal.
As a consequence, unexpectedly, employers may now face enhanced notice/severance liability in terminating an employee without “just cause” (gross misconduct).
Background
Over the course of the last 60 years, our courts have developed a set of common laws…court made laws…intended to protect employees upon the loss of employment. Those common laws include the employees’ right to “reasonable” notice/severance on termination.
In turn, employers have used employment contracts to displace the common law and introduce terms and conditions of employment more favourable to them. Typically, employment contracts will seek to fix and sometimes limit the employees’ right to notice/severance at common law.
In response, our courts have engaged in an all out assault on employment contracts…seeking and finding technical and other reasons to set the employment contract aside in favour of the common law.
The decision in Waksdale is yet another stark example of that.
Waksdale v. Swegon North America Inc.
Mr. Waksdale was employed by Swegon North America Inc. (“Swegon”) under the terms and conditions of a written employment contract. The Contract permitted Swegon to terminate the employment relationship in these circumstances:
- summarily (without notice or severance) for gross misconduct amounting to “cause” or “just cause”; or
- summarily (without notice or severance) for gross misconduct amounting to “cause” or “just cause”; or
After 8 months of employment, Swegon elected to terminate Mr. Waksdale’s employment without “just cause”. In doing so it provided him with his minimum statutory entitlements under the ESA in strict compliance with the employment contract between the parties.
Mr. Waksdale sued Swegon for wrongful dismissal seeking 6 months’ severance under common law principles.
It was Mr. Waksdale’s position that the employment contract was invalid and unenforceable. Interestingly, his argument focused on the provision that permitted Swegon to terminate his employment for “cause” even though his employment was terminated “without cause”.
In fact, the parties conceded and the court concluded that the termination provision providing Swegon with the right to terminate Mr. Waksdale’s employment without “cause” was properly and legally drafted. Under that provision, Mr. Waksdale’s severance entitlement was, in fact, fixed and limited to the ESA minimum.
However, it was Mr. Waksdale’s position that the “for cause” provision in his employment contract was invalid and unenforceable as it was inconsistent with the minimum standards under the ESA.
It is important to understand that “for cause” and “just cause” are terms created under our common law. As you will know, an employee who engages in gross misconduct amounting to “cause” can be terminated summarily or without notice or severance at common law.
Conversely, the ESA uses different language to deny a terminated employee statutory notice, termination pay and/or statutory severance. The ESA provides that an employee is disentitled to the statutory entitlements only if she/he has engaged in “wilful misconduct, disobedience or neglect of duty that is not trivial and has not been condoned by the employer”.
The threshold for “cause” at common law is different than that for “wilful misconduct” under the ESA. It can be said that “cause” at common law is broader than “wilful misconduct” as defined under the ESA. As such, in theory, an employee could be denied severance at common law for misconduct amounting to “cause” but still be entitled to notice, termination pay and/or statutory severance under the ESA.
Lower Court Decision
Applying previously established principles, the lower court denied Mr. Waksdale’s wrongful dismissal claim and awarded $16,000.00 in costs to his former employer, Swegon.
While Swegon conceded that the “cause” provision under the employment contract did contravene or violate the ESA, it argued that it should not impact upon the employer’s ability to rely upon the separate and distinct contractual right to terminate without “cause”. In other words the termination provisions were separate and distinct and one could be severed from the other.
The lower court agreed. In doing so, the court held that the termination for “cause” provision could stand on its own and was not relevant to determine Mr. Waksdale’s notice/severance entitlement upon termination without “cause”. The court states as follows:
“…[the without “cause” 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.”
That was a fairly consistent approach followed by the courts in previous cases (Khashaba v. Procom Consultants Group Inc.).
Court of Appeal Decision
Rather surprisingly, the Ontario Court of Appeal overturned the decision by the lower court on appeal.
In doing so, it held that a “cause” termination provision that violated the ESA rendered the separate “without cause” provision invalid notwithstanding that the employer (Swegon) was not relying upon the “cause” provision. As a result, Mr. Waksdale was entitled to “reasonable” notice/ severance at common law (in excess of his minimum statutory entitlement under the ESA).
Simply put, the Court of Appeal noted that the power imbalance between employer and employee is such that employment contracts must be interpreted in a way that encourages employers to comply with minimum statutory obligations under the ESA.
The Court of Appeal held as follows:
- termination provisions in an employment contract must be read or interpreted as a “whole” and not on a separate or piecemeal basis;
- termination provisions in an employment contract must be read or interpreted as a “whole” and not on a separate or piecemeal basis;
- termination provisions in an employment contract must be read or interpreted as a “whole” and not on a separate or piecemeal basis;
As a result, the action was remitted to the lower court to determine Mr. Waksdale’s “reasonable” notice/severance entitlement on common law principles. That entitlement will be substantially more than was otherwise provided for and agreed upon under the employment contract between the parties.
What Does This Mean for Employers?
Inevitably, employment contracts include a “for cause” termination provision that allows the employer to terminate the employment relationship for misconduct amounting to “cause” at common law. Sometimes, those provisions include a “laundry” list of acts which are expressly defined to constitute “cause”.
If your contracts contain a “for cause” termination provision, arguably, the entire termination provision is now invalid and unenforceable.
On termination “without cause” your severance liability may not be fixed or limited to the ESA minimum or otherwise. Instead, the employee will be entitled to “reasonable” notice/severance at common law.
Employer Takeaway
Employment contracts will continue to be the cornerstone of good human resource practice. However, employers need to be even more attentive to ensure that all termination provisions contained in their employment contracts are entirely compliant with the minimum standards under the ESA.
We recommend the following:
- that you immediately review your existing employment contracts to determine if your “for cause” provision is invalid by reason of the Waksdale decision;
- if so, that you:
- change your existing employment contracts for new hires in order to bring them into compliance (see below); and
- consider steps to change your employment contracts with existing employees in order to bring them into compliance. To do so, the change in contract language must be accompanied by “fresh consideration”. In other words, the employee must receive something of value in return for the change in contract language (i.e. signing bonus, promotion, pay increase, enhanced benefits etc.). Alternatively, you could incorporate the change by providing the employee with “reasonable” notice in advance of implementing the contract change;
- to bring your existing employment contracts into compliance with Waksdale, you could consider these options:
- rolling back your definition of “cause” such that it mirrors the ESA threshold (“wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”); or
- include a “saving” provision that confirms the terminated employee remains entitled to notice, termination pay or statutory severance under the ESA if the misconduct relied upon to support termination “for cause” at common law does not reach the threshold of “wilful misconduct” under the ESA; and
- seek the advice of your employment law counsel in order to ensure these matters are properly addressed moving forward. The members of the Employment Law Group at Sullivan Mahoney LLP are available to provide you with that advice and assistance.
Disclaimer: Information made available in this article is provided for general information purposes only and is provided without representation for its accuracy or completeness. It is not legal advice and should not be relied upon. You should not take any action or fail to take any action based on the information set out in this article or on this website. Consult a lawyer at Sullivan Mahoney LLP and seek professional legal advice tailored to your unique situation.
