Court of Appeal rules that unenforceable “for cause” termination clause voids separate “with notice” termination clause

On June 17, the Ontario Court of Appeal overturned a lower court’s decision on the enforceability and severability of termination clauses¹. In doing so, the Court determined that an unenforceable “for cause” termination clause rendered all termination provisions in an employment agreement void, regardless of whether or not the termination provisions are separated within the agreement.

What you need to know

• This ruling confirms that courts will interpret employment agreements as a whole and not on a piecemeal basis.
• In this instance, the Court of Appeal held that one aspect of a termination clause may impact the enforceability of the entire termination scheme, regardless of whether they are distinct clauses and separated within the employment agreement.
• The Court of Appeal held that where part of the termination scheme is deemed unenforceable on the basis of violating a statute, the existence of a severability clause may not be applied to sever the offending portion.
• Ontario courts continue to provide varying—and sometimes conflicting—decisions on the interpretation of termination clauses, reinforcing the general principle that each case must be considered on its facts and circumstances.

Background

The plaintiff Benjamin Waksdale was terminated without cause on October 18, 2018, and brought an action for wrongful dismissal and moved for summary judgment, claiming 6 months’ pay in lieu of notice for his 8 months of employment.

The “with notice” termination provision in Mr. Waksdale’s employment contract provided that he would receive “one week notice or pay in lieu”. The plaintiff argued that the “with notice” termination provision was unenforceable because the “for cause” termination provision found elsewhere in the employment contract breached the terms of the Ontario Employment Standards Act 2000, S.O. 2000, c. 41 (ESA), and therefore, he was entitled to a period of notice in accordance with what was reasonable under common law.

The defendant conceded that the “for cause” termination provision violated the ESA and was not enforceable. Despite this, the defendant’s position was that since the “for cause” termination provision was distinct from the “with notice” termination provision in the employment agreement, a finding that one provision was unenforceable did not render the separate, stand-alone termination provision void.

The motion judge agreed with the defendant, relying on the recent decision in Khashaba v. Procom Consultants Group Ltd.² In Khashaba, the judge reasoned that non-compliance with the ESA in one of the termination clauses does not void the entire employment agreement, and that the remainder of an agreement’s clauses, including a separate termination “without cause” provision, remained valid and enforceable. This led the motion judge in this case to similarly conclude that the stand-alone “with notice” termination clause was enforceable without reference to the “with cause” termination provision. As a result, the motion judge found that the plaintiff was only entitled to the amounts outlined in the “with notice” termination provision of the employment agreement.

The Court of Appeal’s decision

The Court of Appeal overturned the motion judge’s decision. In its brief reasons, the Court held that the correct analytical approach when assessing termination provisions “is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA”. As such, the Court held that the illegality of the “for cause” termination provision at issue rendered the “with notice” termination provision unenforceable, and the fact that the employer did not seek to rely on the “for cause” provision was irrelevant.

In coming to this conclusion, the Court emphasized two guiding principles regarding the interpretation of termination clauses in employment contracts: that the ESA is remedial legislation intended to protect the interests of employees and that termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA³.

Additionally, the Court concluded that it was irrelevant whether the termination provisions were found in one place in the agreement or separated, or whether the provisions were by their terms otherwise linked. The Court also declined to apply the employment agreement’s severability clause noting that severability clauses “cannot have any effect on clauses of a contract that have been made void by statute”. In the Court’s view, since the termination provisions were to be understood together, the severability clause could not sever the offending portion of the termination provisions.

Conclusion

Employers should view this decision as a reminder of the care that must be taken in drafting termination clauses in employment agreements. While termination clauses are useful tools, they are only effective when they comply with the relevant statutory regime. Employers would be well-advised to stay apprised of updates to employment standards legislation when drafting termination provisions to ensure that these provisions can be relied upon when necessary.

_________________________

¹ Waksdale v. Swegon North America Inc., 2020 ONCA 391.

² 2018 ONSC 7616 (Khashaba).

³ Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, citing Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986.