Ontario Court of Appeal Concludes that Impermissible “Termination for Cause” Provision Invalidates Entire Termination Clause in Employment Contract

On June 17, 2020, the Ontario Court of Appeal issued a decision in Waksdale v Swegon North America Inc (“Waksdale”), which involved a dispute regarding the enforceability of a termination clause in an employment contract. In Waksdale, the Court of Appeal overturned the lower court’s decision that the termination clause in question was enforceable. The Court of Appeal’s decision provides clarification with respect to the interpretation of termination clauses and the limitations of severability clauses in employment agreements.

Background

The plaintiff, Mr. Waksdale, commenced his employment with the defendant employer on January 8, 2018. The plaintiff’s employment contract contained a “termination without cause” provision and a “termination for cause” provision. The employment contract also contained a severability clause that stated as follows:

You agree that if any covenant, term, condition or provision of this letter outlining the offer of employment with the Company is found to be invalid, illegal or incapable of being enforced by a rule of law or public policy, all remaining covenants, terms conditions and provisions shall be considered severable and shall remain in full force and effect. 

The plaintiff was dismissed without cause on October 18, 2018. The plaintiff filed a claim against the defendant seeking damages for wrongful dismissal. Notwithstanding the fact that the plaintiff was dismissed without cause, the plaintiff argued that the illegal “termination for cause” provision rendered the entire contract – or at least both termination provisions in the contract – void and unenforceable. Accordingly, the plaintiff sought 6 months’ pay in lieu of notice.

The defendant employer conceded that the “termination for cause” provision was void for violating the ESA but argued that since the plaintiff was dismissed without cause, the “termination for cause” provision was irrelevant to defining the parties’ respective rights and obligations upon termination. (The “termination for cause” provision was not reproduced in the Court’s decision).

The trial court judge dismissed the plaintiff’s claim and concluded that only the “termination without cause” provision applied in the circumstances. The trial court judge noted that the “termination without cause” provision: (1) did not contravene the ESA and was, therefore, valid and enforceable; (2) was a stand-alone clause; and (3) could be enforced without reference to the “termination for cause” provision. The trial court judge further noted that there was no need to invoke the severability clause.

Decision

The Court of Appeal overturned the trial judge’s decision and concluded that the termination provisions in the employment contract were unenforceable because they violated the ESA. The Court of Appeal held that the trial judge erred in failing to read the termination provisions as a whole:

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… 

The Court of Appeal also held that: (1) the enforceability of the termination provisions must be assessed at the time the employment contract was executed; (2) the defendant’s non-reliance on the illegal “termination for cause” provision was irrelevant to determining enforceability of the termination provisions as a whole; and (3) an employer cannot be permitted to insert an illegal provision into an employment contract and then remedy the illegal provision by acting in accordance with the ESA, at a later point in time. The Court reasoned that in permitting such conduct, the employer derives a benefit from the illegal provision, irrespective of whether the provision is relied upon:

12        The mischief associated with an illegal provision is readily identified. Where an employer does not rely on an illegal termination clause, it may nonetheless gain the benefit of the illegal clause. For example, an employee who is not familiar with their rights under the ESA, and who signs a contract that includes unenforceable termination for cause provisions, may incorrectly believe they must behave in accordance with these unenforceable provisions in order to avoid termination for cause. If an employee strives to comply with these overreaching provisions, then his or her employer may benefit from these illegal provisions even if the employee is eventually terminated without cause on terms otherwise compliant with the ESA.   

Finally, the Court of Appeal declined to apply the severability clause to sever the offending “termination for cause” provision from the employment contract, noting that the two termination provisions “were to be understood together” and that “a severability clause cannot have any effect on clauses of a contract that have been made void by statute.”

Significance

The decision in Waksdale signals a shift away from the principle that where termination provisions in an employment contract are seemingly discrete, the illegality of one provision does not render the other provisions void and unenforceable. (See: Khashaba v Procom Consultants Group Ltd, where the Superior Court of Justice held that where a “termination for cause” provision failed to comply with the ESA, the presence of the illegal provision did not void the entire employment contract, and consequently, the remainder of the employment contract’s clauses, including the other termination provisions, remained valid and enforceable).

The decision in Waksdale also serves as a reminder that employers must be careful in drafting clauses that purport to restrict the entitlements of employees upon termination. Employers should review their current and existing employment agreements and, specifically, any “termination for cause” provisions, to ensure compliance with the ESA. In circumstances where an employment contract contains an illegal “termination for cause” provision, and a valid “termination without cause” provision that limits the notice of termination to which an employee is entitled, an employer may not be able to rely on the “termination without cause” provision. As a result, the terminated employee may be entitled to reasonable notice at common law.

For advice specific to your situation, consider contacting your regular lawyer at Rae Christen Jeffries LLP.