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There is a presumption that an employee is entitled to common law reasonable notice upon termination of employment without cause. Employers may rebut this presumption through an enforceable termination clause that, at the very least, provides Employment Standards Act, 2000 (“ESA”) minimums, and displaces an employee’s right to common law reasonable notice.

In the past year, the Ontario Court of Appeal made it clear that it will find as unenforceable a termination clause where even the slightest imprecision could result in an unlawful contract. This trend started in Andros v. Colliers Macaulay Nicolls Inc., where the Court narrowly interpreted a failsafe clause as applying only to the first part of a termination clause but not the second. In Rossman v. Canadian Solar Inc., the same Court concluded that savings provisions, such as a failsafe provision, cannot save employers who attempt to contract out of the minimum standards prescribed by employment standards legislation. And most recently, in Waksdale v. Swegon North America Inc., the Court struck down a valid “without cause” termination sub-clause because the “for cause” termination sub-clause was unenforceable. In short, the Court concluded that where one of the sub-clauses is unenforceable, the entire termination clause must fall and it will not be saved by a severability clause.

Key Takeaways

Waksdale is another reminder to employers that our courts expect near-perfection when it comes to termination clauses. Employers must ensure that termination provisions, both individually and collectively, are precise and do not violate minimum standards legislation. While the principle that a termination provision must not violate the ESA is well-established, the Court of Appeal’s approach in considering the termination language as a whole, rather than separate provisions, is a significant development with far-reaching legal and financial implications for employers. The effect of this decision is likely to extend beyond Ontario. We encourage all Canadian employers to assess the enforceability of termination provisions in existing employment agreements.

Background

In Waksdale, the plaintiff, a 42-year-old Director of Sales earning an annual income close to $200,000, was dismissed without cause after 8 months of employment. Like many employees, the plaintiff had signed an employment agreement that included, among other things:

  • A “without cause” termination provision that restricted the employee’s termination entitlements to one week of notice or pay in lieu, in addition to ESA minimums, which the parties agreed complied with the ESA;
  • A separate “for cause” termination provision that denied the employee termination entitlements when dismissed for cause, which the employer conceded did not comply with the ESA; and
  • A severability provision that treated an unenforceable provision as severable from the rest of the employment agreement.

The employee brought a wrongful dismissal claim, alleging that the validity of the “for cause” termination clause rendered the entire employment agreement, or at a minimum, the “without cause” clause unenforceable, such that he was entitled to common law reasonable notice.

Ontario Superior Court’s Decision

The Motion Judge dismissed the action, concluding that the “without cause” provision was a stand-alone provision that was enforceable without reference to the invalid “for cause” provision. Because the employee was terminated without cause, the fact that the “for cause” provision did not comply with the ESA was irrelevant and did not affect the validity of the “without cause” provision.

Ontario Court of Appeal’s Decision

The Ontario Court of Appeal overturned the Motion Judge’s decision, finding in favour of the employee. The Court held that termination provisions in an employment agreement must be read as a whole and not on a “piecemeal” basis. When assessing whether a termination clause in an employment agreement is enforceable, courts must consider whether all termination clauses in the agreement, read together, violate the ESA. If any part of a termination clause is invalid, every termination clause in the agreement is void and unenforceable—including an otherwise valid “without cause” clause.

In making this decision, the Court of Appeal refused to give effect to the severability clause, stating that a severability clause cannot have any effect on clauses of a contract that have been made void by statute. Having concluded that the termination provisions must be considered together, the severability clause in this case could not be applied to sever the offending “for cause” portion of the termination provisions.