Employers Beware! Ontario’s Highest Court Rejects Common Termination Clause

Termination Cause & For Cause

Despite the unprecedented situation facing employers in June 2020, the Ontario Court of Appeal sent a strong message to employers this month: Your Termination Clause May Not Be As Ironclad As You Think.

We know employment contracts set out entitlements and obligations on both sides. Termination clauses are important clauses in any employment agreement. All employment contracts must at least comply with the minimum standards of the Employment Standards Act, 2000 (the “ESA”).  This helps to establish clear boundaries in the employment relationship.

If there is not enough clarity in a contract, then the employee will usually get the benefit of any ambiguity.

The Court of Appeal recently released a decision that calls a very common element of employment contacts into question: “Termination For Cause” provisions. 

The decision has sounded an alarm for Ontario employers to wake-up, review and update their employment contracts. Employers should beware: their termination clauses may not be effective, and there may be more litigation post-termination than ever before.

Lead up to the Court of Appeal Case

In Waksdale v. Swegon North America Inc., 2019 ONSC 5705, Mr. Waksdale, a 42-year-old employee, worked for only eight months as the Director of Sales before his employment was terminated.

The employment contract between the employee and employer contained termination provisions that sought to limit the employee’s entitlements upon termination.  The agreement contained a “Termination With Notice” clause, and a “Termination For Cause” clause.

In accordance with the “Termination With Notice” provision of the contract, the employer terminated the employee without cause and provided the employee with two weeks’ pay instead of notice as well as amounts for a car allowance.  Despite having worked for only eight months, the employee started a wrongful dismissal lawsuit seeking six month’s pay in lieu of notice.

The employee tried to argue that the “Termination For Cause” clause was invalid. Here, the employee argued that the termination clause contained a provision that the employer could terminate his employment for “just cause,” being the common law standard to terminating an employee without giving them any notice of pay.  However, the minimum standard in the ESA does not contain neither the words “just cause” nor “for cause” – but one way the ESA states an employer can terminate and pay nothing is in the following circumstance:

if the Employee is guilty of willful misconduct, disobedience, willful neglect of duty that is not trivial and has not been condoned by the employer

The employee tried to argue that since the “for cause” termination provisions of his contract is broader than the ESA’s more narrow standard for a termination without pay, that all provisions dealing with termination in his contract are invalid. This would result in entitling the employee the full and more generous common law reasonable notice of termination.

The lower court decided that since the employee was not terminated for cause, the “Termination For Cause” clause did not apply to him.  As the “Termination With Notice” clause was valid, and the employer provided a sufficient amount of termination pay in accordance with the employment contract and the minimums of the ESA, the lower court held that the employee was entitled to nothing more.

Court of Appeal Decision

The employee was not satisfied with this decision and appealed to Ontario’s Court of Appeal.

The Court overturned the lower level decision and upheld the employee’s arguments.

The Court of Appeal determined that both the “termination for cause” and the “termination with notice” clauses have to be read together, and that employment contracts must be read as a whole. If one part of the contract violates the ESA, the other clauses are automatically unenforceable. The Court clearly stated that they will not enforce termination clauses that are in whole or in part illegal.

While it is clear from the Court of Appeal’s decision that a “termination for cause” clause must comply with the minimum standards of the ESA, it did not specifically spell out what the clause said that made it incompliant. However, the impact of the Court of Appeal’s decision is clear: ALL provisions dealing with a termination must be carefully drafted to comply with the very specific and more narrow requirements of the ESA or it will not be enforceable.

As well, the Court of Appeal stated that employers cannot rely on severability clauses to sever invalid termination clauses in order to contract out of the ESA. This is a situation where a person deciding a contract can “sever” or cut out an offending section of a contract, and the rest of the contract is valid.  For employment contracts, Ontario’s highest court found this practice to be improper.

Bottom Line for Employers
The Ontario Court of Appeal was clear: every termination clause in employment contracts must comply with the minimum ESA requirements.  Even if an employee is terminated under a well-worded without-cause provision, that wording may not as matter as much as what is written in the “just cause” provision.

Employers should be mindful that their employment contracts must stick as closely to the minimum requirements of the ESA as possible,  to be enforceable and stand up to judicial scrutiny. Any part of an employment contract that tries to give a lower standard than what is set out in the ESA will void the contract, and the employee will have the benefit of their more generous common law notice entitlements.

Practically, this case may open the door for significantly more wrongful dismissal lawsuits, and employers should be prepared. This case makes once acceptable termination for cause clauses unenforceable.

Employers may well be responsible for increased termination costs than before. If any employer in Ontario is contemplating a termination in the near future, they should consult with legal counsel in order to understand their full exposure.

We strongly recommend having all employment contracts reviewed in order to assess and mitigate risk. All is not lost – there are many attainable ways to roll out new contracts to existing employees, and ensure new employees sign the most up-to-date contract, to ensure termination costs are fixed.

Get in touch with our Employment Law Team if you have any questions about this case or your employment contracts.