Ontario Court of Appeal Deals Another Blow to Employment Contracts

Do you use employment contracts to limit your employees’ severance entitlements? Following a recent Ontario Court of Appeal decision, those contracts may no longer be valid.

Employees can be terminated either for cause or without cause, and most employment contracts try to cover both scenarios. However, “for cause” clauses often run afoul of the Employment Standards Act (ESA). The ESA allows an employee to be terminated without notice or termination pay only if they’ve engaged in “wilful misconduct, disobedience or wilful neglect of duty.” Yet contracts often say that the employee can be terminated for cause for all sorts of other reasons. In short, contracts often allow employees to be terminated without pay or notice in situations where that’s not permitted by the ESA.

Indeed, even if the contract merely permits a termination for cause as defined by the common law, this may still violate the ESA. The common law allows terminations for cause in broader circumstances than the ESA does.

“That’s fine,” you may be thinking. “We usually terminate employees without cause, anyway.” That’s where the Court of Appeal decision comes in.

In Waksdale v. Swegon North America Inc., the “for cause” termination provisions violated the ESA for the reasons discussed above. However, the employee had been terminated without cause, and the “without cause” provisions complied with the ESA.

Nonetheless, the Court refused to enforce the “without cause” termination provisions. It found that the (invalid) “for cause” provisions could not be separated from the (otherwise valid) “without cause” provisions. Since part of the clause was illegal, the entire clause was illegal.

Indeed, the Court said that an illegal “for cause” provision will invalidate the “without cause” provision, even if the two provisions are located in different parts of the contract, and even if there is a “severability” clause which says that if one clause is invalid, the rest of the agreement will remain in force.

In the result, Mr. Waksdale was awarded pay in lieu of common law notice, which was much higher than the severance he would have gotten under the contract.

When Waksdale is combined with the Court of Appeal’s criticism of “saving clauses” last December – finding that a clause which says, “We will always comply with the ESA no matter what we said earlier in the contract,” does not protect an employer who violated the ESA earlier in the contract – it appears that a huge proportion of termination clauses in Ontario will no longer be valid.

The Waksdale decision is yet another example of why it’s so important for employers to have their employment contracts reviewed regularly. Courts are constantly finding new reasons to invalidate contracts and their termination clauses. Employers must move quickly to keep up.