Termination Clauses Under Attack Again: Just Cause and Wilful Misconduct

Thanks to a recent case, employee counsel now have a new arrow in their quiver to attack a written termination clause in an employment agreement. That arrow is labelled “wilful misconduct”.

It is trite law that in the rare circumstance when an employer terminates for “just cause”, the employee is entitled to no notice or payment in lieu of notice. “Just cause” is a common law or judge made concept. Sometimes employers attempt to define “just cause” in their employment agreements, although it is not necessary to do so.

Under the Employment Standards Act, 2000 (“ESA”), if an employer wants to terminate someone for just cause, the standard the employer must meet is that the employee engaged in “wilful misconduct” or “wilful neglect of duty”. The “wilful” component introduces the concept of personal intent. Basically to meet this statutory standard, the employee has to have been acting bad on purpose. This is usually much more onerous for an employer to prove.

The case of Khashaba v. Procom Consultants Groups Ltd., 2018 ONSC 7617, illustrates that a court may be willing to strike out a termination clause (even if the termination was not for cause, as it was in this case). This will be the case if the “just cause” provision of the clause does not recognize the “wilful misconduct” concept under the ESA, and provide an employee with their minimum employment standards if the evidence does not establish “wilful misconduct”.

I know. This sounds like legal gymnastics. But let me give you an example.

Take an employee who has signed an agreement that states she may be terminated for just cause without notice. The employee turns out to be a habitually poor performer and the employer goes through a progressive disciplinary process with the employee. The employee fails to improve and the employer then terminates for cause, and provides no notice or pay in lieu. The employer relies on the termination clause in the agreement.

In this example, the employee was just a really poor performer and did not do it on purpose (or if they did, it will be very difficult to prove). Under the ESA, the employee would be entitled to their minimum statutory entitlements but nothing in lieu of wages or benefits under the common law. So therefore, the clause technically violates the ESA since it provides less than ESA termination entitlements in the event of a just cause termination.

This latest way to attack the clause as being non-compliant with the ESA is akin to the cases we have written about in the past where employees attack termination clauses for being non-compliant with the ESA – for example failure to continue benefits.

In Khashaba, the court held that the “just cause” termination clause was unenforceable but because the employment agreement had a severability clause (the ability to sever a void or illegal clause from the employment agreement while allowing the other provisions of the agreement to remain in effect), the employer was allowed to rely on the remaining and actually relevant part of its termination clause in dealing with Mr. Khashaba. Remember, the Khashaba case was not a for cause termination. However, the lawyer used every arrow in his quiver to attack the entire termination clause.

It is interesting to note that there have been no subsequent cases that have struck out a termination clause on this basis. However, we predict this issue will be before the courts again sooner rather than later.

Key Takeaways for Employers

Employers may want to consider updating their “termination with cause” provisions to ensure there is language in the clause that provides for statutory minimum standards in any event (unless the termination is for wilful misconduct), and to check their employment agreements to ensure they contain severability clauses.

Talk about quiver.