In its recent decision in North v. Metaswitch Networks Corporation, the Ontario Court of Appeal concluded that a severability clause could not be used to “rewrite” or “read down” a termination provision to make it comply with the Employment Standards Act (the “ESA”). Instead, the Court of Appeal held, where any part of a termination clause is void, the entire provision must be struck and the severability clause becomes inoperative. This case is a reminder to employers that there are no shortcuts when it comes to drafting your employment agreements—termination provisions must be carefully drafted to limit termination liability without breaching local employment standards.
Background
The relationship between the employee (“Mr. North”) and Metaswitch Networks Corporation (“Metaswitch”) was governed by a written employment contract, which contained a termination clause and a severability clause. The termination clause granted Mr. North his statutory entitlements to termination pay, severance pay, and benefits continuation under the ESA, if he was dismissed without cause. However, the clause also stated that the calculation of these payments would be limited to his base salary, despite the fact that he also received commissions as part of his compensation.
Metaswitch asserted that, even if the form of calculation was void because it excluded Mr. North’s commissions, the offending sentence could be removed by the severability clause, thereby saving the rest of the termination clause and limiting Mr. North’s entitlements to the statutory minimum. For his part, Mr. North asserted that the termination clause was void and could not be saved by the severability clause, such that he was entitled to common law reasonable notice (or damages in lieu).
The Decision
Both the original application judge and the Court of Appeal agreed with Mr. North that the calculation was void because it “contracted out” of the ESA’s requirements. Under section 5 of the ESA, employers are prohibited from waiving or contracting out of any employment standard prescribed by the ESA, except to provide a greater benefit. In this case, no greater benefit was provided.
Where the Court of Appeal disagreed with the application judge was on the impact of the severability clause. The application judge used the severability clause to excise the offending part of the termination clause, and ordered termination pay on the basis of the ESA. In arriving at this decision, the application judge looked to the parties’ intention by considering the broad language of the severability clause and the express reference to the ESA in the termination clause. The application judge’s reasoning was influenced by an earlier Court of Appeal decision – Oudin v. Le Centre Francophone de Toronto – in which the trial judge held that the parties intended to comply with the ESA and further held that a severability clause could be used to strike out certain portions of a termination clause. The Court of Appeal upheld the trial judge’s decision in Oudin.
In North, the Court of Appeal set aside the application judge’s decision, concluding that it was an error in law for the application judge to merely void the offending portion of the termination clause, while leaving the rest of the clause to be enforced. Where a termination clause contracts out of even one employment standard, the entire clause is void under section 5 of the ESA and the severability clause becomes inoperative to that part of the contract, even if it may still be applied to other provisions. As a result, Mr. North was entitled to receive termination pay based on common law reasonable notice.
While the Court of Appeal recognized the apparent inconsistency with Oudin, it emphasized that its reasoning also took into account subsequent cases and that the trial judge’s reasoning regarding severability clauses had not been part of the appeal in Oudin.
Key Take Aways
The North decision reminds us of the importance of properly drafted termination clauses in written employment contracts. Canadian courts remain committed to honouring the policy considerations that underlie the ESA and employment law more generally – among them, the imbalance of bargaining power, the characterization of the ESA as remedial legislation, and the need to encourage employers to draft compliant termination clauses. On that basis, courts will not allow employers to rely on severability clauses (and, potentially, other saving provisions) as a “safety blanket” for an otherwise void termination clause. Given the impact on employees, such clauses must be enforceable from the start and will likely require a closer examination of the statutory requirements in each province and territory where an employer operates.