New line of attack on employment termination clauses in Waksdale v. Swegon North America Inc. (2020)

The decision of the Court of Appeal for Ontario in Waksdale v. Swegon North America Inc., 2020 ONCA 391, which was released on June 17, 2020, has sent ripples through the employment law world and given plaintiffs a new way of attacking the enforceability of termination clauses in employment contracts.

In Waksdale the plaintiff was a director of sales who sued for wrongful dismissal. The plaintiff moved for summary judgment, arguing he was entitled to damages because the defendant did not provide him with reasonable notice of dismissal. The motion concerned the legal effect of the employment contract.

The plaintiff took the view that the termination clause was void because it attempted to contract out of the minimum standards of the Employment Standards Act, 2000, S.O. c. 41 (the “ESA”). On appeal, the employer company conceded that the “Termination for Cause” provision was void because it violated the ESA, however the defendant argued that the “Termination of employment with Notice” provision was valid because the employer was not alleging cause.

The Court of Appeal held that the motion judge had erred in law in his interpretation of the employment contract. The Court of Appeal stated that the issue for the motion judge was the discrete question of whether the illegality of the ‘Termination for Cause’ provision rendered the ‘Termination of Employment with Notice’ provision unenforceable. The court held that it did.

The Court of Appeal stated that the two parts of the termination clause should not be read separately. The correct approach was to determine whether the provisions in the employment agreement read as a whole violate the ESA, particularly in recognizing the power imbalance between employees and employers, as well as the remedial protections of the ESA, and whether the clause in any way restricts ESA minimum rights. The court held at paras. 11-12:

“it is of no moment that the respondent ultimately did not rely on the Termination for Cause provision. The court is obliged to determine the enforceability of the termination provisions as at the time the agreement was executed…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 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.”

In the alternative, the respondent employer relied on a severability clause in the employment contract, and argued that the severability clause meant that the invalid part of the termination clause could be severed from the valid part. However, at para. 14 the Court of Appeal declined to apply a severability clause to a termination provision that purports to contract out of the ESA. Notice provisions, whether without-cause or for-cause, are to be read and understood together, and the severability clause cannot apply to sever the offending portion of the termination provisions.

Practically, to be enforceable the “for cause” provision must align with the ESA, and 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 Section 2(3) of Regulation 288/01. Accordingly, supposing an employment contract states that “for cause” includes “documented warnings with respect to the performance of your duties that the company considers to be unsatisfactory” or a “poor quarterly review”, or something that would be “trivial”, applying Waksdale, the plaintiff can take the position that it is not ESA-compliant.

For plaintiffs who are wrongfully dismissed, Waksdale represents a new angle to attack termination provisions in employment contracts. Supposing a plaintiff is terminated without cause, but the employment contract reveals a non-ESA compliant for-cause provision, applying Waksdale, the plaintiff can take the position that the entire termination clause is unenforceable. If the entire termination clause is unenforceable, the plaintiff can then look to the common law to determine his or her entitlements upon termination.

This blog has summarized what the case of Waksdale means in the wrongful dismissal context but does not constitute legal advice and is not intended to be a summary of the law relating to wrongful dismissal. Termination clauses are a highly litigated area of employment law. Assumptions should not be made. If you have an employment-related question relating to your entitlements upon termination, it is best to contact a lawyer. Please do not hesitate to reach out for a consultation: colin@cuttresslaw.com