In A Flash

Ontario Court of Appeal Changes the Landscape on Termination Clause Enforceability

It is time to revisit your employment agreements.  The rules of the game have changed.

There is a presumption at common law that an employee is entitled to reasonable notice of termination, where the employee is terminated “without cause”.  This presumption is rebuttable, but only where there is an enforceable employment contract in effect between the parties that provides otherwise, and provided that the termination clause does not offend – or have the potential to offend – any applicable minimum statutory requirements.

In recent years, the Court of Appeal has released a number of decisions which, for the most part, have simply clarified the prevailing jurisprudence respecting how termination clauses need to be structured in order to properly rebut the common law presumption of reasonable notice.  With some exceptions, this has generally allowed for some improved level of predictability as to what termination language will be upheld by the Courts.

On June 17, 2020, the Ontario Court of Appeal dramatically altered the landscape when it comes to the enforceability of termination clauses in employment agreements by reinforcing the attack on “just cause” termination clauses and by seriously undermining the historical application of severability clauses.

In Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Ontario Court of Appeal was asked to address a situation involving an employment contract with two separate termination provisions, contained in different paragraphs within the contract. 

One provision addressed termination on a “with cause” basis, which the parties agreed was unenforceable on the basis it provided a lesser benefit than Ontario’s employment standards legislation.  The other provision addressed termination on a “without cause” basis, which the parties agreed was lawful and enforceable when considered as a stand-alone provision.  The issue was whether the unenforceability of the with cause termination clause rendered unenforceable the entire termination scheme.

At first instance, the Ontario Superior Court of Justice determined that since the employee was terminated on a without cause basis, the enforceability of the separate ‘with cause’ termination provision did not impact the analysis.  The contract was found to rebut the common law presumption of reasonable notice, and the action was dismissed.

On appeal, the Ontario Court of Appeal overturned the lower court’s decision, ruling that it is irrelevant whether termination provisions are all found in one place in the agreement or separated, or whether the provisions are linked.  A contract’s termination provisions must be read as a whole, and not considered on a piecemeal basis.  Therefore, because the ‘with cause’ termination provision in the case at hand was contrary to the Employment Standards Act, 2000 (“ESA”), all of the termination provisions were considered null and void and unenforceable for all purposes. 

In reaching this decision, the Ontario Court of Appeal refused to give any effect to the severability clause, rationalizing that a severability clause cannot have any effect on clauses of a contract that have been made void by statute.  Although this principle itself is not new, the Court of Appeal’s approach in considering all of the termination language as a whole, rather than separate provisions, is a very significant development in the law respecting enforceability, with far-reaching consequences for employers, likely extending beyond Ontario.

All Canadian employers are strongly encouraged to seek legal advice concerning the enforceability of their existing employment contracts, in light of these developments.

If you have any questions regarding this development or any other workplace law issues, please do not hesitate to contact a Mathews Dinsdale lawyer.

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