Time for New Employment Contracts

The rules of the game have changed. Due to a significant decision by the Ontario Court of Appeal, many existing termination clauses in employment contracts may not be enforceable any longer. This decision could have sweeping implications for both employers and employees.

Waksdale v Swegon North America Inc.

In this case, an employee sued his employer for wrongful dismissal upon being terminated “without cause” after only 9 months of employment. The employment contract between the employer and employee had two termination provisions. One provided for a “without cause” termination, and the other provided for a “for cause” termination.  The parties agreed that the “for cause” termination clause was unenforceable. The issue in this case was whether the “for cause” termination clause being unenforceable rendered the “without cause” termination clause unenforceable, too.

The Court of Appeal held that both clauses are unenforceable because termination clauses must be read as a whole and not considered on a piecemeal basis.  Further, it is irrelevant where the termination clauses are found in the agreement, or whether the “without cause” and “for cause” termination clauses are linked to each other. In reaching this decision, the Court of Appeal refused to given any effect to the severability clause as severability clauses cannot save clauses which are void by statute.

Why is this important?

Until this case, the understanding was “without cause” and “for cause” termination clauses were analyzed independently from one another. This meant just because the “for cause” termination clause was unenforceable did not change an employees’ entitlement upon termination as the “without cause” clause prevailed (so long as it was in compliance with the ESA). This case says the exact opposite.

The reason why this is such a sweeping case is because most “for cause” termination provisions are unenforceable. Many employers – and even lawyers – are unaware there are actually two standards to establish a just cause termination in Ontario: the common law standard, and the ESA standard. The ESA standard requires employers to prove “willful misconduct” whereas the common law standard only requires an employee’s misconduct to produce a “total breakdown in the employment relationship”.

It is entirely possible employee misconduct could constitute a total breakdown of the employment relationship yet not be done by the employee willfully. This means an employee’s misconduct could satisfy the common law standard but not the ESA standard.

Unless your employment contract explicitly carves out a distinction between termination for cause and termination for “willful misconduct”, the “for cause” termination clause may be unenforceable and, now due to this new case, all termination clauses may be rendered unenforceable as well.

Recommended Action

In light of this development, I strongly encourage employers to seek legal advice concerning the enforceability of their existing employment contracts. Not doing so risks all termination provisions in the employment contract being unenforceable. This could result in having to pay common law reasonable notice despite the parties’ intentions to only pay/receive the minimum entitlements pursuant to the ESA upon termination. Updating employment contracts will come at a cost but the cost of doing so will pale in comparison to the unavoidable costs associated with being required to payout larger notice periods and/or the legal fees associated with fighting a wrongful dismissal lawsuit on the basis of unenforceable termination provisions.

On the employee side, all terminated employees should consult with a lawyer for advice about their rights and entitlements upon termination. What may seem like a clear-cut, plainly-worded termination clause may not be enforceable and, in turn, employees may be entitled to much more notice upon termination than expected.

Common law reasonable notice can be wide ranging depending on various factors unique to the employee. It is oftentimes calculated in months and even years. In comparison, the ESA minimum entitlements are calculated in weeks up a relatively low maximum. Accordingly, this decision will have sweeping implications for both employers and employees moving forward.

Authors: Nathan Wainwright