Confidentiality Clause Voids an Employment Contract, The Lawyer’s Daily (August 31, 2022)

(this article originally appeared in the Lawyer’s Daily on August 31, 2022)

By Nikolay Y. Chsherbinin

Employees are entitled to know at the beginning of an employment relationship what their entitlement will be at the end of their employment. To accomplish this objective, employers often spend a great deal of financial and human resources in drafting comprehensive employment agreements, just to find out, usually in court, that they are unenforceable. Some of the key terms which often find their way into a written employment contract are termination and confidentiality provisions. An employment case in point is Henderson v. Slavkin, 2022 ONSC 2964 (Henderson), where the Ontario Superior Court found that the confidentiality clause, which contemplated the employee’s dismissal for cause for its breach, was ambiguous and therefore voided the employment contract.

In Henderson, the plaintiff, Rose Henderson, worked for oral surgery dental office for 30 years as a receptionist. Her employment was pursuant to a verbal employment contract. In 2015, Henderson’s principals, Dr. David Slavkin and Dr. Melvyn Kellner, who were 68 and 65 respectively, began to make plans for their future retirement. Given their plans to retire, on May 26, 2015, they offered all of the staff employed by them, including Henderson, new written employment contracts. In the contract, Henderson was offered a choice: sign the contract in exchange for a $500 payment or do not. If the latter eventuality occurs, Henderson would be placed on a 24-month working notice, based on her current terms. At the end of the working notice Henderson would be offered the provided written employment contract and if she declines to accept it, her employment will be terminated effective May 26, 2017. Two days later, Henderson signed the employment contract. Subsequently, on Aug. 26, 2019, Slavkin retired. On Nov. 1, 2019, Kellner advised Henderson that he would be retiring in March 2020 and that her employment would be terminated on April 30, 2020, thereby placing her on a six-month working notice.

Following her dismissal, Henderson launched a wrongful dismissal action, where she successfully argued that the employment contract, which she was asked to sign in 2015, was illegal because it contained provisions that were contrary to the Employment Standards Act, 2000 (ESA). As such, Henderson contended that her employment was wrongfully terminated and that she was entitled to common law damages. The action was adjudicated by means of a summary trial, with cross-examinations and re-examinations on affidavits conducted at trial. At the commencement of trial, the parties advised the court that, in the event it finds that Henderson was wrongfully dismissed, they had agreed upon a reasonable notice of 18 months.

The central issue before the court was the enforceability of the termination and confidentiality clauses. Having scrutinized the wording of the termination without cause provision, the court found, perhaps surprisingly, that it was not contrary to the ESA.

The clause read: “your employment may be terminated without cause for any reason upon the provision of notice equal to the minimum notice or pay in lieu of notice and any other benefits required to be paid under the terms of the Employment Standards Act, if any. By signing below, you agree that upon receipt of your entitlement under the Employment Standards Act, no further amount shall be due and payable to you … .”

As can be seen, the termination clause does not specifically refer to a statutory severance pay. On that basis, Henderson rightfully argued that the termination clause was unenforceable, because it allowed the employer to contract out of the ESA by not paying Henderson her statutory severance pay. It matters not that Henderson’s employer was not a severance-paying employer, because an employer cannot contract out of a protected employment standard under the ESA. The Ontario wrongful dismissal jurisprudence makes it clear that even a potentialbreach of the ESA will void the termination clause.

In Henderson, the court appears to have been persuaded by the defendants’ argument that the termination clause should be read in context and as a reflection of the clear intent of the parties that the minimum requirements of the ESA apply. If so, then the court’s approach is faulty. Why? Because in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, the Court of Appeal for Ontario reaffirmed that: “the wording of the clause alone must be looked at to decide whether it contravenes or complies with the ESA.” The court also added that “… because the clause is void, it cannot be used as evidence of the parties’ intention.”

In other words, the parties’ intent to comply with the ESA is of no consequence, because the parties’ subjective intention cannot be allowed to override the plain language in the termination provision. Nor can it alter the reality that the termination provision drafted by the employer is contrary to law. Very recently in Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451, the Court of Appeal reminded, in context of the enforceability of the termination provisions that: “by allowing subjective considerations to distort and override the wording of those provisions, the motion judge committed an extricable error of law reviewable on a correctness standard.”

The court next scrutinized the wording of the provision titled “confidential information,” which obligated Henderson, inter alia, not to disclose any confidential information relating to her employer’s business. The clause listed a wide range of items that Henderson was not allowed to disclose, which included “office forms” and “instruction sheets.” Notably, the clause prescribed the penalty for its breach, stating: “in the event that you breach this clause while employed by the Employer, your employment will be terminated without notice or compensation in lieu therefore, for cause.” In essence, the confidentiality provision was an extension of the “termination with cause” provision. As such, the scope and wording of the clause must have been limited to: “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer,” as mandated by s. 2(3) of the Regulation 288/01.

Ultimately, the court correctly determined that the confidentiality clause was ambiguous, because it was not clear in what circumstances the disclosure of confidential information may occur without immediate termination for cause. It explained that one can conceive of a situation where confidential information may have been inadvertently disclosed in a manner that was not wilful or where the breach was trivial, thereby not breaching s. 2(3) of the Regulation 288/01. Wilful misconduct involves an assessment of subjective intent, almost akin to a specific intent in criminal law.

Henderson serves as a useful reminder that it is irrelevant whether the termination provisions are found in one place in the employment contract or separated, or whether the provisions are by their terms otherwise linked or entangled in any way. It also reaffirms that it is of no moment that the employer did not rely on an illegal termination or confidentiality clause, because it may nonetheless gain the benefit of the illegal clause. Henderson is a stark example of the mischief associated with an illegal confidentiality provision and gains to the employer. Nevertheless, the proper analytical approach on the issue of the enforceability of the termination clause remains the same, which is whether the termination provision in an employment agreement read as a whole violates the ESA. The courts are obliged to determine the enforceability of the termination provisions as of the time an employee executed an employment contract, and by scrutinizing the wording of the impugned clause alone.