A Word (or Two) about Negotiating Employment Contracts

Mitchell Rose - A Word (or Two) about Negotiating Employment Contracts

Ontario Court of Appeal rules in Rahman v. Cannon Design Architecture Inc. that there is not a different legal standard for different people when interpreting employment contracts

The Issue: Should a termination for just cause provision in an employment contract that violates
Ontario’s Employment Standards Act, 2000 (“ESA”) on its face be upheld nonetheless
(as being ESA-compliant) because the employee was sophisticated and had
independent legal advice, and because the parties’ intended to comply with the ESA?

In my 2021 blog about Waksdale v. Swegon North American Inc., 2020 ONCA 391; leave to appeal denied, 2021 CanLII 1190 (S.C.C.), and in my interview with Law Times, a just cause or for cause termination provision in an employment contract that violates the ESA by denying an employee their ESA minimums, will “taint” the rest of the termination provisions in the same contract.

As a result, the termination without cause provisions that might have restricted the employee to ESA minimums, as opposed to their usually higher common law entitlements, will be voided by the offending for cause provision because the contract must be interpreted as a whole. The bottom line? The employer may be obligated to make a severance payout that is far more than they think they bargained for in the event the employee is terminated without cause.

But should the result be different if the employee, in the court’s view, is experienced and sophisticated, if they had independent legal advice and if the parties’ had the subjective intention to comply with ESA minimum standards?

This was the issue facing the Ontario Court of Appeal recently in Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451.

The Answer: No. A violation of the ESA in the contractual language is still a violation, regardless of the parties’ subjective intentions, sophistication, or the fact that they had legal advice. There are not two separate legal standards: one for the unsophisticated and unrepresented, and one for the sophisticated and represented.

According to the Court of Appeal, the “plain wording of the contractual termination provisions runs afoul of the ESA. Accordingly, the provisions are void and cannot govern the termination of Ms. Rahman’s employment”. As a result, it overturned the decision of the motions judge, Mr. Justice Dumphy, that upheld the contractual termination provision and dismissed Ms. Rahman’s action for wrongful dismissal.

If you are interested in reading more about the Court’s reasoning in Rahman, please read “The Fine Print” section below, or the highlighted sections. Otherwise, please join me at the end of this blog for “What You Must Know”.

The Fine Print

Author’s note: All quotations in this section are from the Court of Appeal’s decision in Rahman. All highlights are mine.

The Appellant/employee, Farah Rahman, was “employed by [the Respondent] CannonDesign as a Senior Architect, Principal and Office Practice Leader for over four years. She was given four weeks of base salary when her employment was terminated, without notice or cause. Ms. Rahman sued Cannon Design Architecture Inc. (“CDAI”), Cannon Design Ltd., and The Cannon Corporation (the “Respondents”), claiming damages for wrongful dismissal (the “Action”). She then moved for summary judgment (the “Motion”), asking the court to declare that: (1) the termination provisions in her employment contracts were void because they conflicted with the Employment Standards Act, 2000, S.O. 2000, c. 41, (the ESA”); and (2) the Respondents were her common employers.

[3]         The motion judge interpreted the termination provisions as complying with the ESA and concluded that they governed Ms. Rahman’s termination. The motion judge also concluded that Ms. Rahman had been employed by CDAI alone and dismissed the Action as against Cannon Design Ltd. and The Cannon Corporation.

[4]         By order dated November 18, 2021 (the “Order”), the motion judge dismissed the Action and ordered Ms. Rahman to pay the Respondents costs of $80,000.” Ms. Rahman appealed….

BACKGROUND

The Appellant signed an Offer Letter and an Officer’s Agreement (the “Employment Contracts”) in 2016 before starting her employment with Respondents.

“[13]      The Offer Letter provides that, in the absence of just cause, CannonDesign’s maximum liability “shall be limited to the greater of the notice required in your Officer’s Agreement or the minimum amounts specified in the ESA”.

[14]      There are two “just cause” provisions in the Employment Contracts, one in the Offer Letter and the other in the Officer Agreement. The Offer Letter provision states that no notice will be given if there is just cause to terminate. It reads as follows:

CannonDesign maintains the right to terminate your employment at any time and without notice or payment in lieu thereof, if you engage in conduct that constitutes just cause for summary dismissal.

[15]      The just cause provision in the Officer Agreement states that “if the Employee is terminated for cause, Paragraph 3(a) applies”. Paragraph 3(a) provides that Ms. Rahman would receive one month’s notice.

[16]      While the two provisions conflict, because of the stipulation in the Offer Letter that in such a situation, its terms prevail, it is the just cause provision in the Offer Letter that governs.

[17]      When her employment was terminated, Ms. Rahman was CannonDesign’s most senior Canadian employee. She had overall responsibility for ensuring the smooth operation of the Canadian operations, including leading the business planning and strategy for the Canadian operation.

[18]      By letter dated April 30, 2020, CannonDesign terminated Ms. Rahman’s employment without notice and without cause (the “Termination Letter”). The Termination Letter stated that, “[a]s outlined in [the Officer Agreement], you … will receive four (4) weeks of termination pay”. Ms. Rahman did receive the four weeks of pay.

[19]      Ms. Rahman brought the Action, claiming she was entitled to a longer period of reasonable notice prior to termination and damages for CannonDesign’s failure to provide such notice….

[21]      The motion judge interpreted the termination provisions in the Employment Contracts as requiring payment of the ESA minimum amounts and, accordingly, found them to be valid. He rejected the submission that the termination for cause provisions violate the ESA because: Ms. Rahman had independent legal advice about the offer of employment, and her rights at common law and under the ESA in relation to the possible future termination of her employment; Ms. Rahman was a “woman of experience and sophistication”; and, the parties’ subjective intention was to comply with the ESA minimum standards….

  1. THE EMPLOYMENT CONTRACTS’ TERMINATION PROVISIONS DO NOT GOVERN THE TERMINATION OF MS. RAHMAN’S EMPLOYMENT

[24]      In my view, the motion judge erred in law when he allowed considerations of Ms. Rahman’s sophistication and access to independent legal advice, coupled with the parties’ subjective intention to not contravene the ESA, to override the plain language in the termination provisions in the Employment Contracts. By allowing subjective considerations to distort and override the wording of those provisions, the motion judge committed an extricable error of law reviewable on a correctness standard: Amberber v. IBM Canada Ltd., 2018 ONCA 571, 424 D.L.R. (4th) 169, at para. 65. It is the wording of a termination provision which determines whether it contravenes the ESA – even compliance with ESA obligations on termination does not have the effect of saving a termination provision that violates the ESA: Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, 134 O.R. (3d) 481, at paras. 43-44.

[25]      As explained above, the Offer Letter and the Officer Agreement contain conflicting provisions regarding termination for just cause. However, the Offer Letter stipulates that, in the event of a conflict with the Officer Agreement, its provisions govern. Therefore, the operative just cause provision is the one in the Offer Letter (the “Operative Just Cause Provision”).

[26]      The Operative Just Cause Provision states that no notice or payment will be given if there is just cause to terminate. For ease of reference, I set out that clause again:

CannonDesign maintains the right to terminate your employment at any time and without notice or payment in lieu thereof, if you engage in conduct that constitutes just cause for summary dismissal.

[27]      However, ESA notice and termination pay must be given for all terminations, even those for just cause, except for “prescribed employees”: ESA, s. 55. The disentitlement provision is found in the ESA regulation Termination and Severance of Employment, O. Reg. 288/01. Section 2(1) of the regulation provides:

  1. (1) The following employees are prescribed for the purposes of section 55 of the Act as employees who are not entitled to notice of termination or termination pay under Part XV of the Act:
  2. An employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.

[28]      The wilful misconduct standard requires evidence that the employee was “being bad on purpose”: Render v. ThyssenKrupp Elevator (Canada) Limited2022 ONCA 310, at para. 79, citing Plester v. Polyone Canada Inc.2011 ONSC 6068, 2012 C.L.L.C. 210-022, aff’d 2013 ONCA 47, 2013 C.L.L.C. 210-015. For example, in Oosterbosch v. FAG Aerospace Inc., 2011 ONSC 1538, 2011 C.L.L.C. 210-019, the court awarded damages for ESA notice and severance after holding that the employer had just cause to terminate the employee for persistent carelessness that did not meet the wilful misconduct standard.”

Author’s Note: For more information about the “wilful misconduct standard” and how it differs from common law just cause, please see my blog about the Render decision.

“[29]      There is nothing in the Operative Just Cause Provision that limits its scope to just cause terminations for wilful misconduct. On its plain wording, the Operative Just Cause Provision gives CannonDesign the right to terminate Ms. Rahman’s employment without notice or payment, for conduct that constitutes just cause alone. That means the Operative Just Clause Provision contravenes the ESA and s. 5 renders it void. Section 5 provides that no employer shall contract out of an employment standard and any such contracting out is void.

[30]      This court has repeatedly held that if a termination provision in an employment contract violates the ESA – such as a “no notice if just cause” provision – all the termination provisions in the contract are invalid. See, for example, Waksdale v. Swegon North America Inc.2020 ONCA 391, 446 D.L.R. (4th) 725, at para. 10, leave to appeal refused, [2020] S.C.C.A. No. 292; Rossman v. Canadian Solar Inc.2019 ONCA 992, 444 D.L.R. (4th) 131, at para. 18. In Waksdale, as in the present appeal, the employer had not purported to terminate the employee for just cause. However, the just cause provision in the employment contract violated the ESA. The invalidity of the just cause provision rendered the other termination provisions unenforceable: Waksdale, at para. 10.

[31]      Accordingly, the termination provisions in the Employment Contracts are void and cannot be relied upon by the Respondents.”

As a result, Justice Dumphy’s order was overturned. In addition, the Court found that the Respondents were common employers of Ms. Rahman (they are equally liable for her damages). The common employer sections of the decision will be the subject of a future blog on this separate issue.

In the end the Action was remitted (sent back) to the Superior Court to determine Ms. Rahman’s damages under the common law as she is not limited to her lower ESA minimums.

As at the time of writing, it remains to be seen if the Respondents will seek leave to appeal to the Supreme Court of Canada.

What You Must Know: Key Takeaways

If You Are an Employee:

It continues to be vital for employees to obtain legal advice before accepting a job offer and/or signing an employment contract, as well as upon termination of employment – especially where the employer indicates that its severance package is based on a contract the employee signed earlier. Many employees unknowingly give up their common law rights through employment contracts, or the employer mistakenly believes that the employee gave up those rights when considering severance packages (but the terminated employee won’t realize it without legal advice).

If you are an Employer (including HR professionals and in-house counsel):

Words matter in contracts – even if the other side is sophisticated and represented by a lawyer, or there is evidence about what everyone was intending. Important employment contract provisions are either ESA-compliant based on their language, or they are not. So, it is important that employers have up-to-date employment contracts and job offer letters that take into account the most recent developments in the law, and, therefore, are drafted by experienced employment lawyers. Otherwise, employers may find themselves having to make much larger severance payouts in the future, and incur greater legal expenses, than they had anticipated.

If You Are a Lawyer or Paralegal

Despite decisions like Waksdale and Rahman, enforcing contractual termination clauses remains one of the most unpredictable areas in employment law. While language matters more than anything, and many judges will go to great lengths to interpret contracts to protect employees, there are still various defences that employers can raise. As well, from time to time there are surprising court decisions (including from appeal courts) that “go against the grain” and can prove costly to both sides in the end. Legal professionals need to manage clients’ expectations for risk and cost when litigating disputes where employment contracts are in issue.

 

If you are an employee or employer, I can help you with any contract-related or other workplace issue. I have more than 25 years’ experience as an employment lawyer with satisfied, repeat clients.

If you are a lawyer or paralegal looking to hire a mediator or mediator-arbitrator for your employment law dispute, I have been a mediator for over a decade and I recently started to arbitrate disputes. I conduct employment mediations and arbitrations via videoconference, in-person, and in a hybrid format.

 

This blog is for educational purposes only and is not intended as legal or other professional advice.

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