Termination provisions: A whole New Dimension, The Lawyer’s Daily (June 29, 2020)

(this article originally appeared in the Lawyer’s Daily on June 29, 2020)

By Nikolay Y. Chsherbinin

The issue of enforceability of a termination provision is one of the most frequently litigated areas of employment law. The enforceability of such provisions turns on their wording, the purpose and language of the Employment Standards Act, 2000 (ESA), and jurisprudence on interpreting employment agreements, which continues to vacillate. An employment case in point is Waksdale v Swegon North America Inc. 2020 ONCA 391, where the Court of Appeal for Ontario resolved a vexing question of whether the illegality of the “termination for cause” provision renders the “termination without cause” provision unenforceable, even though the two provisions are set out separately in the employment contract and the former provision was not invoked at the time of dismissal.To employers’ dismay, the Court of Appeal concluded that the offending clause invalidated the non-offending clause, adding that non-reliance on the illegal clause is irrelevant. It clarified that, for the ESA compliance purposes, the two provisions must be read together with due regard to their combined effect.

In Waksdale, Benjamin Waksdale worked for Swegon North America Inc. (Swegon) for a mere eight months as a director of sales, earning approximately $200,000 per annum. His employment was governed by the terms of a written employment contract, which contained an enforceable termination without cause provision and an unenforceable termination for cause provision. Following his without cause dismissal, Waksdale launched a wrongful dismissal lawsuit seeking six months’ pay in lieu of reasonable notice. He argued that because the termination for cause provision in his employment contract was unenforceable, the entire employment contract was void. Swegon conceded that the termination for clause provision violated the ESA but retorted that it is irrelevant to the parties’ dispute, because Waksdale was not dismissed for cause.

The parties’ dispute was adjudicated by way of a summary judgment motion, where the primary argument was the legal effect of the written employment contract. The motion judge concluded that the termination without cause provision was unambiguous, enforceable and stands apart from the termination for cause provision. Since Swegon terminated Waksdale’s employment pursuant to the lawful termination without cause provision, there was no basis on which to challenge the enforceability of that provision. Consequently, the motion judge dismissed Waksdale’s motion and lawsuit.

Waksdale appealed.

On appeal, which was heard in writing, the Court of Appeal had to decide whether the two provisions should be considered separately or whether the illegality of the termination for cause provision impacts the enforceability of the termination without cause provision. The court brushed aside the proposed separation of the two provisions on the basis that an employment agreement must be interpreted as an organic whole and not on a piecemeal basis. It added that it is irrelevant whether the two provisions are intertwined or separated; or whether the provisions are, by their terms, otherwise linked.

Dealing with Swegon’s argument that it did not rely on the termination for cause provision, the appellate court dismissed it stating: “the court is obligated to determine the enforceability of the termination provisions as at the time the agreement was executed; non-reliance on the illegal provisions is irrelevant.” [Emphasis added.]

In support of its conclusion, the court offered the following example: an employee who is not familiar with their rights under the ESA, and who signs a contract that includes unenforceable termination for cause provisions, may incorrectly believe they must behave in accordance with these unenforceable provisions in order to avoid termination for cause. If an employee strives to comply with these overreaching provisions, then his or her employer benefits from these illegal provisions even if the employee is eventually dismissed without cause on terms otherwise compliant with the ESA.

It is trite law that employers and employees are free to agree to any lawful term. Definitions of “just cause” are abundant in employment law and it is not easy to enumerate what would constitute just cause in a particular factual situation. Because the ultimate arbiter of whether there was just cause is the court, at the outset of their employment relationship the parties may not be aware of whether the contractual terms they designated to constitute just cause render “the termination for cause” provision unlawful.

Consequently, to be enforceable a termination for cause provision must only comply with the ESA. In order to achieve that, its scope and wording must be 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. Wilful misconduct involves an assessment of subjective intent, almost akin to a specific intent in criminal law.

It must be kept in mind that the wording of the termination provision alone will be considered in deciding whether it contravenes the ESA. This is because courts will permit an employer to enforce a rights-restricting contract, but they will not enforce termination provisions that are in whole or in part unlawful. A “severability clause” would not have any effect on termination provisions that have been made void by the ESA because, in the circumstances, there is nothing to which the severability clause can be applied. To add a further layer of procedural complexity, the wrongful dismissal jurisprudence reveals situations where just cause for dismissal may be found to exist at common law, but not under the ESA, thereby entitling an employee to his or her statutory entitlements at dismissal.

Waksdale is a welcome development for employees. The Court of Appeal’s clarification that for enforceability purposes non-reliance on the illegal provision is irrelevant and that termination for cause and termination without cause provisions must be read together is a serious cause for employers’ concern, because many employment contracts fail to ensure that their termination for cause provisions are written in a way that comply with the ESA. In turn, this also means that their employees’ existing employment contracts would have to be modified, which is a tricky legal endeavour that must only be undertaken with the assistance of an experienced employment counsel.