Written by David Doorey, York University
A new decision from the Ontario Court of Appeal this week adds to the immense catalogue of cases exploring and often quashing attempts by employers to provide their employees with as little notice of termination as is legally possible. Employers hoping to restrict their obligations to providing the statutory minimum amounts of notice have regularly run into opposition from courts intent on protecting vulnerable employees from one-sided employment contracts that favour employer interests over employees. We can add Waksdale v. Swegon North America Inc to that list.
Here are the basic facts. Waksdale (W) sued Swegon North America (Employer) alleging wrongful dismissal and claiming 6 months’ reasonable notice based on 8 months’ employment. W was 42 years’ old, Director of Sales, and earning in the range of $200K in total compensation. He was terminated “without cause”. The issue was how much notice of termination he was entitled to receive.
The contract contained two clauses relating to termination of the contract: (1) a Termination With Notice clause and (2) a Termination For Cause clause. The Termination With Notice clause, which applied to W’s termination, provided that W would receive the minimum amount of notice and statutory severance pay required by the ESA, plus an additional one week’s notice or pay in lieu. Here is the clause:
Termination of Employment with Notice
You agree that in the event that your employment is terminated without cause, you shall receive one week notice or pay in lieu of such notice in addition to the minimum notice or pay in lieu of such notice and statutory severance pay as may be required under the Employment Standards Act 2000 as amended. All reimbursement for business expenses shall cease as of the date of termination of your employment, however, you shall be reimbursed for legitimate business expenses that have been incurred and submitted to the Company but not as yet paid you to that date. The terms of this section shall continue to apply notwithstanding any changes hereafter to the terms of your employment, including, but not limited to, your job title, duties and responsibilities, reporting structure, responsibilities, compensation or benefits.
Applying that clause, the Employer provided W two week’s pay (one week required by the ESA notice provisions plus one additional week).
The Termination For Cause clause included a long list of grounds that would constitute grounds for termination for cause without notice and indicated that wages and benefits would cease as of the date of termination. At trial, the Employer “conceded that this clause violated the ESA and is unenforceable”, but argued that fact did not matter because W was terminated for cause and therefore this clause is inapplicable.
It is not made clear in either the lower court or the Court of Appeal decision precisely why the clause violated the ESA. However, one way that it does so is that it would possibly permit the employer to terminate W with no notice at all even when the ESA would require notice and possibly severance pay. That’s because the list of grounds for cause include actions that would not necessarily require W to have acted with “wilful misconduct”, which is the standard for denying notice of termination and severance in the Ontario ESA (see s. 2(1)3 of Reg. 288/01). So for example the Termination for Cause clause permits the employer to terminate W with no notice for “unsatisfactory” job performance. It is extremely difficult to make out a case that unsatisfactory job performance amounts to wilful misconduct disqualifying an employee from receiving statutory notice and severance pay. In my Law of Workbook, I discuss Oosterbosch v. FAG Aerospace as an example of a case in which the employer satisfied the common law test for summary dismissal but was still required to pay statutory notice of termination because the poor performance was not “wilful”.
The central issue in the case is whether the illegality of the Termination for Cause clause rendered the entire machinery in the contract regulating termination void, including also the Termination with Notice clause. If that is the case, then cases like Machtinger v. HOJ Industries tell us that courts must imply a requirement for the employer to provide the employee with common law “reasonable notice”, which W argued was 6 months’ in this case.
The Employer pointed to a “severability clause” in the contract that stated that if any single term of the contract is found to be void, then the rest of the contract nevertheless remains valid. This meant, according to the Employer, that the Termination By Notice clause is untainted by the illegality of the Termination With Cause clause. The lower court judge agreed and dismissed the lawsuit.
Court of Appeal: The Termination Provisions are Void
In a relatively short (yay!) decision, the Court of Appeal overturned the lower court decision and ruled that the severability clause did not save the Termination With Notice clause.
The Court begins with some basic principles that are well known by now to employment lawyers, citing Wood v. Fred Deeley. Firstly, the ESA is remedial legislation that is to be interpreted broadly so as to protect as many employees are possible. Secondly, the law should encourage employers to draft termination clauses that will always comply with the ESA termination requirements. Thirdly, the test is whether the contract termination provisions could conceivably permit termination that violates the ESA, not whether the employer actually does violate the ESA at the time of the termination.
The Court then noted an important fourth principle that affects interpretation of employment contracts: that there is a “power imbalance between employees and employers” that should lead courts to hold employers to a high standard of contract drafting. I emphasize this point in Law of Work, including in a devoted Talking Work Law box (see screen shot).
Taking into consideration all of these principles, the Court rules that the entire package of termination provisions must be read together so that illegality of any part of the package voids the entire package:
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. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach without regard to their combined effect.
The Court notes that employers may benefit from illegal clauses even if they never directly rely upon them because employees may believe that the terms are enforceable and adjust their behaviour accordingly. Nor does the severability clause help the employer here, because “a severability clause cannot have any effect on clauses of a contract that have been made void by statute”.
So, to conclude this quick case note, Waksdale v. Swegon North America Inc is important as a reminder that employers must be extremely careful in drafting clauses that purport to restrict the common law entitlements of employees at the point of termination. We learn here that courts will examine the employment contract as a whole and that any potential, conceivable violation of the ESA can render the entirety of the contract’s treatment of termination void. In the end, the Court of Appeal remitted the matter back to the lower court judge, who had not assessed the proper period of notice in his decision.
David Doorey, “Waksdale v. Swegon North America: Another Termination Clause Bites the Dust” Canadian Law of Work Forum (June 19 2020): http://lawofwork.ca/?p=12732