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Ontario Court of Appeal Sends Employers Back to
the Drafting Table … AGAIN!
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Suttner,
Joshua

July
2020

Industry Alerts

On June 17,
2020, the Court of Appeal for Ontario released its decision in Waksdale v.
Swegon North America Inc., (“Waksdale”) 2020 ONCA
391, delivering a seismic victory for employees, upending decades of practice in
drafting employment agreements, and sending companies scrambling to bring their
agreements into compliance with the new reality.

Drafting Employment Contracts before
Waksdale

For years,
employment contracts have been drafted with the following principals in
mind:

The termination provisions in an
employment agreement cannot contract out of the Employment Standards Act (the
“ESA”), meaning that an employee could not agree to receive
less than they are entitled to by statute;

An employee who is terminated for
cause forfeits some or all of their entitlements under the ESA. Accordingly,
many employment agreements provide that if the employee is fired for cause,
they will not be entitled to pay in lieu of notice.

In addition,
employment contracts, like most contracts, almost always contain a “severability
clause,” which provides that if any term of the contract is deemed to be
unenforceable, that term shall be severed from the rest of the contract and
shall not render the rest of the contract unenforceable.

Take a minute.
Check your employment agreements with your employees. Chances are you have a
“just cause” termination provision and a severability clause.

What
Happened in Waksdale

The employment
agreement in Waksdale had three provisions:

a “just cause” termination
provision;

a standard termination provisions
that complied with the ESA; and,

a severability clause.

The employee
was terminated without cause, and pay in lieu of notice was calculated in
accordance with the standard termination provision which complied with the ESA.
There were never any allegations that the employee was terminated for cause and
the “just cause” provision was never relied upon.

The employee
challenged the validity of the standard termination provision (if the standard
termination provision was struck out, the employee would be entitled to common
law reasonable notice, in addition to the statutory minimum notice entitlement
under the ESA). The employee’s position was that the “just cause” termination
provision was offside the ESA and therefore the standard termination clause also
violated the ESA.

Like many
readers and lawyers probably thought, this was a new argument and seemed
far-fetched, especially in light of the severability clause in the agreement.
The Trial Judge agreed. The Trial Judge held that even if the “just cause”
provision was invalid, this did not render the separate without cause provision
that did comply with the ESA invalid.

The Court of
Appeal overturned the Trial Judge’s decision. The Court of Appeal held that
termination provisions need to be read as together:

10…An
employment agreement must be interpreted as a whole and not on a piecemeal
basis. The correct analytical approach is to determine whether the termination
provisions in an employment agreement read as a whole violate the ESA.
Recognizing the power imbalance between employees and employers, as well as the
remedial protections offered by the ESA, courts should focus on whether
the employer has, in restricting an employee’s common law rights on termination,
violated the employee’s ESA rights. While courts will permit an
employer to enforce a rights-restricting contract, they will not enforce
termination provisions that are in whole or in part illegal.  In conducting
this analysis, it is irrelevant whether the termination provisions are found in
one place in the agreement or separated, or whether the provisions are by their
terms otherwise linked. Here the motion judge erred because he failed to read
the termination provisions as a whole and instead applied a piecemeal approach
without regard to their combined effect.

The Court of
Appeal went on to say that it made no difference that the employer did not
allege just cause when the employee was terminated. The agreement must be
interpreted at the time it was signed and non-reliance later on does not excuse
the invalidity.

Finally, the
Court of Appeal declined to consider the severability clause. Once the
termination provisions had to be read as one provision of the agreement, they
could not be saved by a severability clause as severability clauses cannot save
a provision which is void by statute.

Is
this decision final?

The employer
in Waksdale is considering appealing to the Supreme Court. There is a chance the
Supreme Court may choose to hear the case because of its wider implications for
contract law, including termination provisions and severability clauses. But
there is also the possibility that the Supreme Court may decline to hear the
case because it is based on an interpretation of the ESA, an Ontario statute.
The Supreme Court is often satisfied letting the Ontario Court of Appeal have
the final say on Ontario statutes and it may do so in this case.

For now, the
Court of Appeal’s decision is the new law in Ontario until overturned by the
Supreme Court or narrowed by a future decision of the Court of
Appeal.

Where
Do Employers Go from Here?

The Waksdale
case has far-reaching implications for anyone with an employment contract in
Ontario. It will now be more expensive to terminate employees without cause and
the termination provisions which employers intended to rely upon may no longer
provide the protection bargained for. So what can employers do now?

The first step
is to review your employment contracts, and not just the termination provisions.
Even if your employment contracts were drafted by experienced counsel fairly
recently, chances are they may contain the three offending provisions from the
Waksdale case and may also contain other provisions that have been found offside
by the Courts. The Court of Appeal tossed years of convention and practice out
of the window. Employment contracts must be reviewed and updated
regularly.

Practically
speaking, this means to be enforceable the “for cause” provision in the
termination section will have to align with ESA.  In order to
achieve that, the termination for cause must be limited to: “wilful misconduct,
disobedience or wilful neglect of duty that is not trivial and has not been
condoned by the employer” as mandated by s. 2(3) of the Regulation
288/01.

As a further
precaution against drafting an employment agreement that violates the ESA,
counsel can help craft a clause which guarantees employees no less than the
minimum they are entitled to under the ESA, while carefully providing that
common law entitlements, which are over and above the ESA minimums, are
ousted.

For anyone
reading outside of the employment context, the Court of Appeal did not get rid
of severability clauses entirely. Its decision may turn out to be restricted to
employment contracts. However, it is worth reviewing any long-term contracts
with your lawyers to consider whether there are any clauses which may be
vulnerable to being invalidated by statute and considering whether there are any
arguments to be made that those clauses should be read together with other
clauses, such that they might be determined to be a single clause and invalidate
the other clause too.

Related Practices

COVID-19
Developments

Contacts

Joshua
Suttner

Associate
Toronto

T:416-646-3847

E:[email-masked]

Tracy
Bergeron Lucha

Partner
Toronto

T:416-777-4047

E:[email-masked]

Wendy
Hulton

Partner
Toronto

T:416-777-4035

E:[email-masked]

Eric
Kay

Partner
Toronto

T:416-777-4011

E:[email-masked]

Mark
Shapiro

Partner and
Canadian Litigation Practice Group Chair
Toronto

T:416-646-4603

E:[email-masked]

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