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Client Alert – Canada (Ontario) – risk of unenforceable employment termination provisions

Jul 23, 2020
  • FisherBroyles News

The enforceability of many termination provisions in employment agreements in Ontario, Canada, is now in doubt following a decision of the province’s Court of Appeal.  Businesses with staff in Ontario should be revising contracts (including for existing staff) accordingly.

In brief, the Court decided that if the termination provisions dealing with “cause” or “just cause” violate the Employment Standards Act, 2000, (ESA) the entire termination provision is unenforceable. The decision will have far-reaching implications for employers in Ontario because many employment agreements do not address ESA entitlements upon termination for cause (and in Canada, there is no concept of “employment at will”).  In light of this case, employers should be revising both existing and template employment agreements to better withstand the inevitable challenges that will come from employees.

 

Background to the Issue

The issue arises because of the differences between the ESA’s standard of “wilful misconduct” and the common law notion of “cause”. The ESA sets a very strict standard for an employee to be disentitled to notice of termination (or termination pay in lieu of notice) and severance pay.  Under the statute, the employee must be “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” The common law standard of “cause” is a broader concept.  While it would encompass most types of behaviour that would meet the ESA test, it can also include other types of employee behaviour that would not.

In recent years, some courts have found that if the cause provisions of an employment contract did not properly account for this distinction between the common law and the ESA, the provisions were void.  However, prior court decisions had limited these findings of invalidity to the cause provisions only, and had continued to apply valid non-cause termination provisions. Thus, the finding of invalidity had limited practical effect.

 

Waksdale v Swegon North America Inc., 2020 ONCA 391

This all changed with the recent decision of the Ontario Court of Appeal in Waksdale v Swegon North America Inc.  The employment contract in this case contained a detailed cause provision, but also contained a provision allowing the employee’s employment to be terminated without cause by providing all ESA entitlements plus an additional week of notice (or pay in lieu) for each year of service.  The validity of these provisions was challenged in a wrongful dismissal claim after the employee was dismissed without cause.

The employer conceded that the cause provision of the employment agreement violated the ESA.  However, the motions judge found that the non-cause provision was valid and, consistent with prior cases, applied the non-cause provision and limited damages to the contractual entitlements.

On appeal, the Ontario Court of Appeal overturned this finding.  In doing so, the Court found that it was an error of law to read the cause and non-cause provisions of the employment agreement in isolation from each other.  Rather, all aspects of the termination provisions must be considered together in all cases, and must be assessed with reference to the time that the agreement was made.  Thus, it did not matter that the employer in Waksdale had not asserted cause.

If any of the provisions are void, typically because they do not fully comply with the provisions of the ESA, the entirety of the termination provisions will be unenforceable.  In the Waksdale case, this meant that the employee was entitled to common law damages based on reasonable notice principles, and not the more limited contractual entitlement.

For additional information, please contact Peter Finding at peter.finding@fisherbroyles.com with any questions or more specific situations.

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