‘TERMINATING’ TERMINATION CLAUSES IN EMPLOYMENT CONTRACTS

REVISED January 14, 2021

Waksdale v. Swegon North America: Court of Appeal for Ontario rewrites employment contract law

The Issue: Can One ‘Bad Apple’ Clause Spoil the Whole Bunch?

To limit employees to their minimum entitlements under the Employment Standards Act, 2000 (“ESA”) upon termination of their employment, as opposed to the usually greater common law entitlements (or something in between the two), Ontario employers frequently use contracts (a.k.a. written agreements) with carefully crafted termination clauses (a.k.a. provisions).

However, employers—or their legal professionals who do their drafting—need to be careful that their termination clauses do not create a scenario where the employee would be contracting out of the minimum standards under the ESA. Otherwise, the termination clause may be void, and the employee will automatically receive their common law entitlements upon termination. Based on court decisions over the last decade or so, this is easier said than done.

Most of the attention has been on when termination without cause  provisions violate the ESA (see my series of Canadian Lawyer articles) as opposed to clauses that provide for termination with (just) cause (or, for cause) since for cause terminations are much rarer, and, if successful, result in the employee not receiving their common law entitlements. However, such an employee might still be entitled to their lesser ESA minimums. As well, although for cause terminations are rarer than terminations without cause, termination for cause provisions in employment contracts are commonplace.

However, what should happen when a contract’s for cause provision violates the ESA, but the without cause provision does not violate it, and an employee is terminated without cause?  Should the ‘bad apple’ termination for cause provision spoil the perfectly good termination without cause provision? If so, should this still be the case even if the employee was not terminated for cause?

The Answer:  “Yes”, according to the Court of Appeal

In Waksdale v. Swegon North America Inc., 2020 ONCA 391, released on June 17, 2020, the Ontario Court of Appeal answered that question in the affirmative and ordered the court below to assess the plaintiff employee’s damages based on his greater common law entitlements. In other words, the contract’s termination clauses were ‘terminated’, or cancelled, because, according to the Court, “an employment agreement must be interpreted as a whole and not on a piecemeal basis” and “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.”

Employee-side lawyers cheered, employer-side lawyers booed, and those, like me, who represent both sides—and who are also mediators—were simply surprised.  The cheers and boos then got louder when, in January 2021, the Supreme Court of Canada announced that it would not hear an appeal by the employer, Swegon North America Inc.  Waksdale remains the law of Ontario.

The Fine Print

Beyond the fact that many termination clauses in employment contracts will now be invalid, Waksdale raises some interesting points  (if you are not an employment-law nerd, or ridiculously curious, like me, or an employer who uses employment contracts, then you may wish to skip the following Fine Print, and rejoin me at the section below this, What You Must Know):

1. The Court of Appeal decision did not contain either of the termination clauses in issue, and the motions judge decision only included the termination without cause provision and not the one dealing with termination for cause. However, through a trusted source, I was able to obtain this ‘lost clause’:

Termination for Cause

It is understood that grounds for immediate termination without notice includes:

[various grounds for just cause are set out]

If the Company terminates your employment pursuant to this Section, you shall be entitled to receive your then current unpaid base salary set out above accrued to the date of termination and the Company shall not be required to pay any anticipated remuneration, and all benefits shall be discontinued as of the date of termination.

2. Counsel for both parties agreed that the above provision violated the ESA, presumably for the reasons contained in some decisions in recent years such as KhashabaProcom Consultants Group Ltd., 2018 ONSC 7617 because it makes no reference to entitlements under the ESA (in which a higher standard—wilful misconduct—is required to deny an employee fired for cause their minimum ESA rights). Interestingly, the judge in Khashaba reached a different conclusion than the three-judge panel in Waksdale on whether the bad apple for cause clause spoiled the without cause clause (also, try saying the underlined words ten times quickly).

3.  While it is not surprising that the Court ruled that a severability provision did not save the offending for cause provision, in light of earlier case law, I wonder whether the outcome of this appeal would have been different had the contract contained a clause to the effect that the employee would receive at least his minimum ESA entitlements notwithstanding any other provision in the contract.

4. While I am usually supportive of judges holding employers to a very high standard in terms of contractual wording when they try to deny an employee their common law entitlements in termination without cause provisions, the Court may have set the bar unnecessarily high in Waksdale. The Court refused to enforce an otherwise valid termination without cause provision due to a with cause provision that is not even necessary to terminate an employee for cause. The latter contractual provision is superfluous because the right to terminate for just cause can always come from the common law. This is a different situation from a without cause provision that tries to take away common law rights from employees but violates the ESA.

Post-Waksdale Decision

On July 17, 2020, the Justice Mandhane of the Ontario Superior Court released the first decision to apply Waksdale.  In Sewell v. Provincial Fruit Co. Limited, 2020 ONSC 4406, the Court considered the enforceability of the following employment contract termination clause:

b) Termination by the Company for Just Cause

The Company is entitled to terminate your employment at any time and without any notice or any further compensation for just cause and the Company will not have any further obligations to you whether at contract, under statute, at common law or otherwise.

c) Termination by the Company without Just Cause

(A) The Company will be entitled to terminate your employment at any time without just cause by providing you with the following:

…

(ii) a payment, or at the Company’s sole option, notice or combination of notice and pay in lieu of such notice representing termination pay and, if applicable, severance pay, as may be required under the Employment Standards Act, 2000, as amended from time to time (the “Separation Period”);

…

It is agreed that upon compliance with the above provisions, the Company will be release from any and all obligations to you, whether statutory, under contract, at common law or otherwise.

The Plaintiff employee was dismissed without cause and sought damages in lieu of common law notice while the Defendant employer sought to rely on paragraph c) above (ESA minimums and no common law notice). While the Court found that paragraph c) was illegal because it violated the ESA based on an earlier Court of Appeal decision (Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158), applying Waksdale, the Court also found “that the “Termination for Just Cause” provision [para. b)] of the contract was illegal insofar as it contracted around the ESA requirement to provide notice except in cases where an employee engaged in “willful misconduct.”  The judge concluded: “Based on the Court of Appeal’s reasoning, I must read the contract as a whole and set it aside if one or more of the terms are illegal, even if the offending term is not at issue in the instant case.”

Any employer who has been putting off an overhaul of their contract because Waksdale was thought to be an anomaly is duly warned to instruct an experienced employment lawyer immediately make the necessary changes,  or else they should get ready to write bigger cheques for severance payments (which can far exceed the legal fees needed to avoid that situation).  This is especially important now that the Supreme Court refused an Application for Leave to appeal in Waksdale.

Meanwhile though, employees should not just assume that a termination clause that is currently void under Waksdale and Sewell will be void forever because, no doubt, the law will continue to evolve. It is far better for them not to sign a contract that containing ESA-only type language in the termination ‘without cause’ clause, despite what the ‘for cause’ provision states.

What You Must Know: Key Takeaways

If you skipped the above ‘Fine Print’, here are key takeaways for employers, employees, and legal professionals from both Waksdale and Sewell, which follows Waksdale:

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

• Employers with employment contracts—especially (but not only) if they are older than two years—should immediately consult with an employment lawyer to see if their termination clause(s) have been rendered invalid. If so, you can discuss creating a new contract that complies with Waksdale—or not. However, there are probably other updates you might require in any event as the law is always changing and no contract lasts forever anyway. Your lawyer can also tell you how to legally introduce a new contract to existing employees and future hires.
• Do not terminate an employee’s employment based on what you think you owe under your existing contract without first speaking to an employment lawyer.
• Never use boilerplate contracts that were not custom created for you specifically.

If you are an Employee:

• Let’s just say that you might not want to bring Waksdale to your employer’s attention while you are still employed by them—unless you have a special role like the company lawyer, you’re a corporate director, in an executive role, or you are high up in human resources. Why? See above.
• If you are suddenly presented with a new contract to sign, then don’t sign it until you have obtained the advice of an employment lawyer.

If you are a Lawyer or Paralegal:

• Now is the time to go through your filing cabinet (physical or virtual) and see if you prepared any employment contracts or have templates with termination clauses now invalidated by Waksdale. If so, you should put your client on written notice (and feel free to send them this blog).
• If you are a legal professional who does not regularly draft and review employment contracts, now is not the time to start.
• As a mediator, I can tell you that you should not assume that an employment contract will or will not be declared valid if you don’t settle and you get to court (assuming you get there eventually given COVID-19 related closures). Waksdale is a good reminder of how unpredictable this area of the law is, and how things can change on a dime. Make sure you have properly managed your client’s expectations of risk.

The bottom line: The Waksdale decision rendered many termination clauses invalid. See my article in Law Times, January 20, 2021.

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. I have also been regularly conducting virtual employment mediations via videoconference.

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