Ontario Court of Appeal decision will make you give your termination clause a second look

By Merovitz Potechin on Tuesday October 27, 2020.

In Ontario, termination clauses in employment contracts must comply with the Employment Standards Act (ESA). When provisions of an employee’s contract fail to comply with the ESA, the non-compliant provisions are unenforceable. However, a recent Ontario Court of Appeal decision expands the scope of unenforceability.

As of June 17, 2020, an unenforceable “for cause” termination clause in an employment agreement also renders unenforceable the entire termination provision, including the “without cause” clause. In the absence of a valid termination clause, a terminated employee can exercise their common law rights, which often provide for a longer notice period than ESA minimums. This has significant implications for employers and employees alike and should prompt both parties to review their employment agreements.

Background

In Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Appellant employee was terminated from his employment without cause and received two weeks’ pay in accordance with his employment agreement. The Appellant employee acknowledged that the “without cause” provision of his agreement complied with the minimum requirements of the ESA. However, he argued that the “for cause” provision breached the ESA and as a result, the “without cause” provision was unenforceable as well.

The Court of Appeal sided with the Appellant employee. In their decision, the judges reasoned that an employment agreement must be interpreted as a whole and not on a piecemeal basis. The court held that the correct approach is to determine whether the termination provisions in an employment agreement, read as a whole, violate the ESA. The Court highlighted the inherent power imbalance between employers and employees and noted that even if an employer does not rely on an illegal termination clause, it may nonetheless benefit from employees mistakenly believing the clause is valid.

Implications

This decision impacts employers and employees but the concern for employers is that the agreements for their entire workforce may have unenforceable termination clauses. This is especially pertinent at a time when many businesses are making tough choices about their staffing needs. This is an opportune time to review employment agreements.

Conversely, employees stand to benefit greatly from this decision and should be aware of what their rights are under the ESA if they wish to challenge their termination clause. The employer in this case has sought leave to the Supreme Court of Canada to appeal this decision. However, in the meantime, if you think the termination clause of your employment agreement may not comply with the ESA, please contact our employment lawyers at Merovitz Potechin LLP.