Ontario Court of Appeal Limits Severability of Termination Clauses in Employment Contracts

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On June 16, 2020, the Court of Appeal for Ontario handed down a decision that will have a profound impact on the enforceability of termination provisions in Ontario employment agreements. In Waksdale v. Swegon North America, Inc., the Court of Appeal held that if the termination provisions governing “cause” of an employment contract violate the Employment Standards Act, 2000 (“ESA”), those provisions are not severable and the entire termination provision of the employment agreement is void and unenforceable.

Factual Background & Procedural History

Benjamin Waksdale (“Waksdale”) began his employment with Swegon North America, Inc. (“Swegon”) on January 8, 2018. He was hired as a director of sales and his total income was approximately $200,000/year. Waksdale’s employment agreement contained the following provisions:

  • A “without cause” termination provision that restricted Waksdale’s termination entitlements to one week of notice or pay in lieu, in addition to ESA minimums, which the parties agreed complied with the ESA;
  • A separate “for cause” termination provision that denied Waksdale termination entitlements when dismissed for cause, which Swegon alleged did not comply with the ESA; and
  • A severability provision that treated an unenforceable provision as severable from the rest of the employment agreement.

The “for cause” termination provision was comprehensive and provided nine grounds of a “for cause” termination, including “any matter recognized by the Courts to justify termination for cause.” Importantly, however, the “for cause” definition did not recognize the ESA’s higher standard of willfulness.

On October 18, 2020, Swegon terminated Waksdale’s employment without cause. Waksdale was paid two weeks’ pay in lieu of notice, as provided in his employment contract.

Waksdale brought a wrongful dismissal claim, claiming that the invalidity of the “for cause” termination clause rendered the entire employment agreement, or at a minimum, the “without cause” clause unenforceable, such that he was entitled to common law reasonable notice. He sought six months of pay in lieu of reasonable notice.

The Motion Judge dismissed the action, concluding that the “without cause” provision was a standalone provision that was enforceable without reference to the invalid “for cause” provision. Because Waksdale was terminated without cause, the fact that the “for cause” provision did not comply with the ESA was irrelevant and did not affect the validity of the “without cause” provision.

Ontario Court of Appeal’s Decision

The Court of Appeal for Ontario overturned the Motion Judge’s decision and found in favor of Waksdale. The Court held that the employment agreement’s termination provisions must be interpreted as a whole and not on a “piecemeal” basis. As such, when determining whether an employment contract’s termination clause is enforceable, courts must consider whether all termination clauses in the agreement, read together, violate the ESA. If any part of a termination clause is invalid, every termination clause in the contract is void and unenforceable, including an otherwise valid “without cause” clause, and even if such clause is not disputed.

To arrive at this decision, the Court of Appeal emphasized the remedial nature of the ESA, noting that the ESA intends to protect employees’ interests due to the power imbalance that exists in the employer-employee relationship. Therefore, the Court stressed that “[c]ourts should thus favor an interpretation of the ESA that encourages employers to comply with the minimum requirements of the [ESA].”

In addition, the Court of Appeal refused to give effect to the employment contract’s severability clause. The Court stated that a severability clause cannot affect clauses that have been made void by statute. Having concluded that the termination provisions must be considered together, the severability clause in this case could not be applied to sever the offending “for cause” portion of the termination provisions.

Swegon is seeking leave to appeal this decision to the Supreme Court of Canada.

Looking Ahead: Implications for Employers

The Waksdale decision likely will have far-reaching implications for Ontario employers and is another reminder that Ontario courts expect employers to draft precise termination clauses. Notably, employers must ensure that termination provisions do not violate minimum ESA requirements. This is important because most termination provisions likely reiterate the common law principle that employment may be terminated without advance notice for cause, without referencing the ESA’s higher standard. Employers also should be mindful that courts likely may continue to consider termination language as a whole, instead of as separate provisions. Finally, the effect of this decision may extend beyond Ontario. As such, all Canadian employers should assess the enforceability of termination provisions in existing employment agreements and should revise non-complying provisions accordingly.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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