Recent Changes to Termination Clause Enforceability
Employers in Ontario should review their employment contracts in light of recent case law addressing the enforceability of termination clauses.
In Waksdale v. Swegon North America Inc., 2020 ONCA 391 (“Waksdale”), the Ontario Court of Appeal clarified the rule for interpreting termination provisions in an employment contract. The Court found that employment contracts, including termination provisions, must be read as a whole. Applying this reasoning, the Court set aside an otherwise enforceable without-cause termination provision because the for-cause provision did not comply with the Employment Standards Act (“ESA”). This has been characterized as a harsh decision, since it allows for an entire termination clause to be voided even if the offending term is not in issue.
Waksdale was recently followed by the Ontario Superior Court of Justice in Sewell v. Provincial Fruit Co. Limited, 2020 ONSC 4406 (“Sewell”).
The plaintiff in Sewell was employed in a senior sales role for six months, at which point he was terminated by the defendant employer without cause. The employer paid the plaintiff two weeks’ salary and benefits, consistent with the employment contract and the requirements of the ESA. The plaintiff brought a summary judgment motion seeking, among other relief, a declaration that the termination clause in the employment contract was unenforceable.
The plaintiff’s employment contract contained for-cause and without-cause termination provisions. The for-cause provision allowed the employer to terminate the plaintiff at any time and without notice. The without-cause provision entitled the employer to terminate the plaintiff at any time as long as the employer paid a combination of notice and severance pay.
The Court held that the termination clause violated the ESA for two reasons:
- The without-cause provision combined notice and severance pay, which violated the ESA requirement to pay both notice and severance; and
- The for-cause provision contracted around the ESA requirement to provide notice except in cases where the employee engaged in “wilful misconduct”.
Applying Waksdale, the Court found that the invalid for-cause provision rendered the entire termination clause unenforceable. Even though the for-cause provision was not at issue (since the plaintiff was dismissed without cause), the Court reaffirmed that employment contracts must be read as a whole and that they should be set aside if any of the terms are in contravention of the ESA. Accordingly, the Court concluded that the employment contract was void, and that the plaintiff was entitled to reasonable notice of four months under the Common Law, rather than two weeks under the ESA.
Implications for Employers
Employers should review their employment contracts to ensure that their termination provisions comply with the minimum ESA requirements. Specifically, employers should confirm that their termination clauses provide employees with appropriate notice and that they do not combine notice and severance pay entitlements. Since leave to appeal to the Supreme Court of Canada was recently refused in Waksdale, the Court of Appeal’s reasoning represents the current state of the law in Ontario.