Ontario Employers Would be Wise to Review their Employment Agreements in Wake of the Waksdale Decision

Employers and businesses in Ontario should be aware of an important decision from the Court of Appeal for Ontario that may invalidate termination provisions in existing employment contracts.

In Waksdale v Swegon North America Inc, 2020 ONCA 391, the Court held that an otherwise valid without cause termination provision was rendered invalid by a separate with cause termination provision. As a result, the employer had to pay the employee damages for wrongful dismissal. The Supreme Court of Canada has since denied an application for leave to appeal the case.

This case has raised multiple different opinions with some commentators believing it to be “a game changing decision which dramatically altered the landscape” and others saying that it “should not be seen as the portent of contractual calamity that some have made it out to be”. The potential effects of this decision are yet to be fully seen. But at least two cases: Sewell v Provincial Fruit Co Limited and Lamontagne v J L Richards & Associates Limited, have applied and followed the decision in Waksdale. It’s therefore an important case for employers and businesses in Ontario to be aware of as it could expose them to increased risk and severance obligations.

A Termination and Two Provisions: One Valid, One Void

The Facts of the Case

The employee was terminated without cause after being employed for only eight months. In accordance with the termination clause in his contract, the employee was paid two weeks’ pay in lieu of notice. However, the employee commenced an action against the employer for wrongful dismissal, arguing that he was entitled to damages because he was not provided with reasonable notice of dismissal.

The employment contract contained two separate termination provisions: “Termination for Cause” and “Termination of Employment with Notice”. The employer, in terminating the employee without cause, relied on the latter provision. This clause was found to be compliant with the Ontario Employment Standards Act (the “ESA”) and therefore valid and enforceable. However, both parties agreed that the “Termination for Cause” provision was void because it attempted to contract out of the minimum standards of the ESA.

The Illegal Provision

“Termination for Cause” provisions, or “just cause” provisions, are commonly found in employment contracts. These provisions state that the employer may terminate the employee without notice, or pay in lieu, if they have just cause to do so. The standard for cause in Ontario is a high standard and it is set out in the regulations as: “… wilful misconduct, disobedience or wilful neglect of duty that is not trivial …”.  In the employment contract at issue, the employer set out a lower standard for “just cause” than the regulations and was therefore found to be attempting to contract out of the minimum statutory requirements. Accordingly, the Court of Appeal for Ontario concluded the provision was illegal and unenforceable.

The Issue and Court’s Finding

The question considered by the Court of Appeal was whether the illegality of the “Termination for Cause” provision rendered the otherwise valid “Termination of Employment with Notice” provision unenforceable. The Court of Appeal concluded that it did on the basis that the invalidity of the “Termination for Cause” provision impacted the enforceability of the “Termination of Employment with Notice “and therefore, when read as a whole, violated the ESA. As a result, the employee was entitled to common law damages for wrongful dismissal.

The Court of Appeal found no relevancy in the fact that the employer ultimately did not rely on the illegal provision in terminating the employee. Instead, the Court of Appeal stated that whether or not the employer relies on an illegal provision during termination, the employer nonetheless gains a benefit by setting a lower standard for “just cause” because an employee will strive to meet that overreaching provision throughout their employment.

The court cited two points from Wood v Fred Deeley Imports Ltd that they found particularly appropriate for their analysis. First, the ESA is intended to protect the interests of the employee. The courts should therefore favour an interpretation that encourages employers to comply with the minimum requirements of the Act and extend its protection as far as possible. Second, termination clauses should be interpreted in a way that encourages employers to comply with the ESA. It’s evident that this decision is a continuation of courts providing employees with increasingly generous protections.

What Could Waksdale Mean for Employers and Businesses?

Common law has long recognized that a provision in an employment contract that attempts to contract out of the ESA minimums is void and unenforceable. Waksdale has seemingly expanded this scope by considering two separate termination provisions as a whole, regardless of which one was relied upon in the actual termination.

This decision is giving many employers and employment lawyers pause. Employers and businesses in Ontario may in fact need to review their employees’ contracts to see if they are open to the risk of having their termination provisions found invalid.

Regardless of whether or not termination provisions in employment contracts could be invalidated, employers should be aware of the employee-centric approach courts are continuing to take in employment disputes.

This is especially important as we begin to enter a post COVID-19 world and the issues of justice in employment over the past year and a half begin to appear in the courts. An oft-quoted judgement by Chief Justice Dickson will likely be something the courts keep in mind in adjudicating these claims:

“Work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self‑worth and emotional well‑being. Accordingly, the conditions in which a person works are highly significant in shaping the whole compendium of psychological, emotional and physical elements of a person’s dignity and self-respect”.

If you have any questions about this case and what it might mean for you or your business, please contact our Labour & Employment Law Team.

This publication was written by Employment Lawyer Kirstn Mase and Student-at-Law Jolene Sanderson.