Ontario appeal court ruling marks substantial shift in enforcement of termination clauses

The Ontario Court of Appeal has ruled that where one provision of a termination clause doesn’t meet minimum statutory requirements, it renders the entire clause unenforceable.

In Waksdale v. Swegon North America Inc., the court reversed a Superior Court of Justice ruling in favour of plaintiff Benjamin Waksdale’s former employer Swegon. Superior Court Justice Edward Morgan found that while the company’s termination of Waksdale with cause provision violated the Ontario Employment Standards Act, he was terminated under the without-cause provision, which was compliant with the law, and those two provisions should be considered separately.

In their decision, Court of Appeal Justices Sarah Pepall, C. William Hourigan, and Lois Roberts ruled the termination provisions must be read together.

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“Recognizing the power imbalance between employees and employers, as well as the remedial protections offered by the ESA, courts should focus on whether the employer has, in restricting an employee’s common-law rights on termination, violated the employee’s ESA rights,” wrote the justices. “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.”

While Swegon asserted that its severability clause should apply to the with-cause provision of the contract — which would keep the rest of the contract in effect if one portion were found to be “invalid, illegal or incapable of being enforced by a rule of law or public policy” — the justices disagreed.

“A severability clause cannot have any effect on clauses of a contract that have been made void by statute,” they wrote. “Having concluded that the termination for cause provision and the termination of employment with notice provision are to be understood together, the severability clause cannot apply to sever the offending portion of the termination provisions.”

Read: Ontario Court of Appeal ruling highlights interpretation of termination clauses

The mid-June ruling is a substantial shift in how termination clauses have been enforced, but follows a trend of recent court of appeal rulings on these clauses, says Daniel Attwell, a partner at Matthews, Dinsdale & Clark LLP.

“Why the court of appeal considered this case differently than other cases in the past, I think, is more just indicative of the overall trend of the court of appeal to be more and more willing to strike down these clauses where they think there are potentially some deficiencies. It’s not new, this idea of wanting to ensure that employees are sufficiently protected and that poor-intentioned employers can’t take advantage of potentially offside termination clauses.”

Attwell says he’s concerned with the court’s choice to effectively ignore Swegon’s severability clause. “I think, in certain circumstances, the severability language probably is not going to serve the employer’s interests, if you have one clause that has several parts to it but it’s all encompassed together. But I think where the contract is crafted — and deliberately so — with very separate and distinct provisions, . . . severability language should serve a useful purpose, otherwise you’re ignoring language that the parties have specifically contracted for.”

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The ruling could have a potential impact in other provinces and may eventually have to be reviewed by the Supreme Court of Canada, he noted. “I think the generality of the issues in play here will certainly be considered . . . and, therefore, potentially have [an] impact in other provinces. And that’s where I see the Supreme Court potentially having an interest in this case and even going beyond employment law [to] . . . how severability clauses are treated going forward. I certainly see that as having broader implications.”

Going forward, employers should look at their employment contracts carefully and keep the language simple, adds Attwell. “What we’ve seen in the past is . . . well-intentioned employers can run afoul of what the court of appeal is saying about these things. If you try to be too specific or too detailed in what it is you’re providing for, . . . the more likely it is you run into issues.”

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He also suggested that employers be mindful of how much further the court’s line of analysis could go. “If the court’s prepared to look at [these two termination provisions] all together — notwithstanding any clear language in the contract — . . . I don’t think it would be outside the realm of possibilities for challenges to be made [that], if any aspect of the contract is in violation of the Employment Standards Act, to strike the entire thing.

“I don’t think the law is there — certainly this case doesn’t say that. But I think it’s reason for employers to be concerned. They should be looking at their contracts as a whole, including its constituent parts to make sure that everything is on side.”