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Ontario Employers Now Faced with the Possibility of Unenforceable Termination Clauses

Ontario Employers Now Faced with the Possibility of Unenforceable Termination Clauses Following Court of Appeal Decision

Comment on Waksdale v Swegon North America Inc., 2020 ONCA 391 by Feriel Latrous

On June 17, 2020, the Ontario Court of Appeal released its anticipated decision in Waksdale v. Swegon North America Inc. (“Waksdale”) regarding a wrongful dismissal action brought by Benjamin Waksdale against his former employer, Swegon North America Inc.

The issue in Waksdale surrounded the discrete question of whether the illegality of the Termination For Cause provision rendered the Termination Without Cause provision unenforceable, entitling Benjamin to a period of common law reasonable notice.

On summary judgment, the motions judge dismissed Benjamin’s action, holding that the Termination Without Cause provision, which was enforceable, was a “stand-alone clause, and is enforceable without reference to the Termination with Cause clause.” On appeal, the Court disagreed.

Factual Background

In essence, Waksdale alleged wrongful dismissal following a termination without cause after eight months of employment. The employment contract between both parties included provisions for Termination For Cause, and Termination Without Cause.

Although the ‘Termination Without Cause’ provision was enforceable, the Court of Appeal held that the Termination For Cause provision violated the Employment Standards Act, 2000 (“ESA”), because it did not meet the minimum requirements of section 2 of the Act.

The Court began its analysis with the well-established law of Wood v. Fred Deeley, namely, that the imbalance in power between employers and employees places upon employers a high standard when drafting their employment agreements; that the ESA is remedial legislation, and is to be interpreted broadly; that employers are to draft termination clauses that comply with ESA requirements; and, whether the contract termination provisions could conceivably permit terminations that violate the ESA.

In arriving at its decision, the Court of Appeal emphasized an interpretation of the ESA that “encourages employers to comply with the minimum requirements of the Act” and to “extend its protections to as many employees as possible”, over an interpretation that does not. Should employers not comply, “little or no incentive to draft lawful termination clauses at the beginning of the employment relationship” exists.

These principles have previously been illustrated in Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC) and Deeley whereby the analysis surrounding restrictive termination clauses for potential, even minor, breaches of the ESA, have since become progressively more technical.

In Waksdale, the Ontario Court of Appeal clarified that provisions contained in employment agreements must be read holistically, rather than separately, in order to analyze their combined effect and determine whether an agreement, as a whole, violates the ESA.

The Court also rejected the application of a “severability” clause that would have otherwise separated the “for cause” and “without cause” provisions.

Effects ensuing from the Decision

This case will have a long-lasting impact on thousands of employers across Ontario as many can no longer rely on the enforceability of their termination clauses. The now illegal language found in Waksdale’s employment contract can be found in almost all employment agreements across Ontario. As a result, employers are now faced with the inability to depend on their contracts to limit employees’ termination entitlements.

Due to COVID-19, employers have faced many challenges, included an unprecedented volume of terminations. Combined with the above, they may now also face disputes arising from this decision, possibly eliciting a rise in termination and severance pay obligations.

The Court’s decision in Waksdale signals a new serious liability for Ontario employers who will need to amend many of their employment contracts to include enforceable Termination For Cause provisions. The decision however simultaneously presents some optimism for employees, who may now be entitled to more than the minimum remedial protections offered by the ESA.

This case is an important judiciary development with respect to the ongoing effort to mitigate the inherent power imbalance between employees and employers, by increasing employers’ liability when terminating employment relationships. In short, employers will need to review and update their employment contracts to respect the new enforceability guidelines established in Waksdale, while employees should have their termination provisions reviewed by an employment lawyer.

*[1]In one analysis the author questions how Waksdale will affect employment contracts more generally. In other words, if any other provision of an employment agreement is found contrary to the ESA, how will this affect the enforceability of the termination provisions? Since the Court explained that an employment contract must be read and interpreted as a whole and not on a “piecemeal basis”, employees now dispose of another avenue when challenging employment agreements, while employers face yet another risk when terminating employees.

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