Ontario Court of Appeal finds that illegal “just cause” provision voids all termination provisions

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Recently in Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Ontario Court of Appeal was faced with an employment agreement which contained two separate termination provisions, contained in different paragraphs within the agreement. One provision addressed termination on a “just cause” basis, which the parties agreed was illegal because it provided a lesser benefit than the Ontario Employment Standards Act, 2000 (“ESA”). The other provision addressed termination on a “without cause” basis, which the parties agreed was lawful and compliant with the ESA when considered as a stand-alone provision. The issue for the Court of Appeal was whether the two clauses (“just cause” and “without cause”) should be considered separately or whether the illegality of the just cause provision impacted the enforceability of the without cause provision. The Court found that the termination provisions must be read as a whole, and not considered on a piecemeal basis. Therefore, because the just cause termination provision violated the ESA, the entire termination provisions were considered null and void and unenforceable.

 

Background

The employee initially sued his employer for wrongful dismissal and moved for summary judgment, arguing that he was entitled to damages because the employer did not provide him with common law reasonable notice of dismissal. The employee took the position that the termination provisions in his employment contract were void because they contracted out of the minimum standards of the ESA. The employer conceded that the just cause termination provision in the employment agreement was void because it violated the ESA. However, the employer argued that the without cause termination provision was valid, and because the employer was not alleging just cause, it could rely on the without cause provision alone. The employee acknowledged that the without cause provision alone was valid and enforceable. The question was therefore whether the illegality of the just cause provision rendered the without cause provision unenforceable. The matter was first brought before a motion judge of the Ontario Superior Court who dismissed the employee’s case, concluding that the without cause provision was a stand-alone, unambiguous and enforceable clause, notwithstanding the illegality of the just cause provision. The employee appealed this decision to the Court of Appeal.

 

Court of Appeal Decision

The Court of Appeal found that the motion judge erred in law in his interpretation of the employment contract and allowed the appeal. The issue for the Court of Appeal was whether the two clauses (“just cause” and “without cause”) should be considered separately or whether the illegality of the just cause provision impacted the enforceability of the without cause provision.

The Court said 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. 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, the Court of Appeal held 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. The Court found that 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 also concluded that it was irrelevant that the employer ultimately did not rely on the just cause termination provision. Rather, the enforceability of a termination provision must be determined at the time the employment agreement was executed.

In reaching this decision, the Court of Appeal refused to give any effect to the severability clause in the employment agreement, finding that a severability provision cannot have any effect on contract provisions that have been made void by legislation. Having concluded that the just cause and without cause provisions were to be understood together, the severability clause could not apply to sever the offending portion of the termination provisions.

 

In Our View

Employers will certainly want to take note of this decision. There is a presumption at common law that an employee is entitled to reasonable notice of dismissal where they are terminated on a “without cause” basis. In determining what constitutes common law reasonable notice, courts consider the following factors: the employee’s age, position, length of employment, and the availability of similar employment. Common law reasonable notice is more generous than the minimum requirements under the ESA. However, this presumption is rebuttable by having an enforceable employment agreement with termination provisions, provided these provisions do not offend or potentially offend any applicable minimum statutory requirements. The Court of Appeal’s decision in considering the termination language as a whole, rather than separate provisions (“just cause” and “without cause”), is a significant development in the law regarding termination clause enforceability. This decision seems to stand for the proposition that an otherwise legal without cause termination provision (viewed alone) can be rendered unenforceable if the just cause provision violates the ESA (and not saved by a severability clause).

This decision underscores the importance of reviewing employment contracts periodically, to carefully consider whether the termination provisions comply with the ESA in light of recent case law. While the enforceability of any termination provisions will depend on the specific wording, employers should seek legal advice concerning the enforceability of their existing employment contracts, including termination provisions, given this important development.

 

For further information, please contact Kecia Podetz at 613-940-2752 or Colleen Dunlop at 613-940-2734.