EMPLOYERS BEWARE! A recent court decision may have just made your current employee agreements unenforceable.
On June 17, 2020, the Ontario Court of Appeal provided its troubling decision on the case of Waksdale v Swegon North America Inc., 2020 ONCA 391 (“Waksdale”). Yes, you should be taking notes.
Why is this decision so troubling for employers? The Court found that if any part of a termination clause in an employment agreement is found to be in violation of the Employment Standards Act, 2000 (“ESA”), then all other clauses in the Agreement can be deemed unenforceable as well. That means your carefully crafted employment agreement may not hold up in Court!
In Waksdale, an employee was terminated after 10 months of employment on a “without-cause” basis and paid two weeks’ pay in lieu of notice. The employee’s salary was a hefty $200,000 per annum.
The employee sued the employer for wrongful dismissal and brought a motion for summary judgment. No, you are not expected to know what “summary judgment” is, and it will not be on the final exam (“Summary judgment” is a motion brought by a party against the other to have the case decided without a trial).
During the motion, the employer admitted that the termination “for cause” provision of the employment agreement violated the ESA.
How and why, you ask?
The offending clause potentially allowed the employer to terminate the employee without any notice or pay in lieu of notice if the employee was fired “for cause”. It seems fair as an employer, right? Well, Ontario Regulation 288/01 under the ESA provides that notice or pay in lieu of notice must be provided by the employer unless the employee has engaged in wilful misconduct, disobedience or wilful neglect of duty. Unfortunately, for an employer, this is not easy to prove in Court.
The employee in Waksdale argued that the entire termination section in the employee agreement, including the portion that was deemed illegal, should be read together which would render the entire section unenforceable.
The employer cried “severability!” and pointed to the severability clause in the agreement that stated that if any part of the contract was found to be void, the rest of the contract that was deemed legal and consistent with the ESA remained enforceable. Severability meant that as the employer in Waksdale had terminated “without cause”, and this part of the clause was valid, it could not be invalidated just because the “for-cause” provision was illegal and existed in the same document.
The motions judge agreed with the employer and dismissed the action. THE END.
If only! Sorry employers, you should recork the champaign bottle, because this case was appealed to the Ontario Court of Appeal.
What did the Court of Appeal say? The severability clause could not save the termination “with-notice” clause from the part of the agreement that was illegal.
It was the Court’s opinion that the ESA should be interpreted broadly in a way that protects as many employees as possible, as they are the vulnerable party in the relationship. The Court of Appeal found that the law should encourage employers to draft termination clauses that comply with the ESA, and while the Courts “permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal.”
So, what does that mean? Well, in this case it means that the employer cannot rely on the severability clause in the agreement, and the entire termination clause is therefore void.
If the employer could rely on their termination clause, they could have limited the amount of notice the employee was entitled to two-weeks’ notice. Without a contract limiting the employee’s notice entitlement to the ESA minimum, the employer is on the hook for “common law reasonable notice,” which can work out to months or years of notice pay. Yikes, right?
The Court of Appeal referred this matter back to the lower court to determine how much is owed to the employee by the employer. With the entire termination clause voided, the employee is no longer required to accept the ESA minimum and can make his claim for 6 months’ pay in lieu of notice (as he initially sought). That’s a lot to potentially pay out for such a perceivably small mistake on an employee agreement, isn’t it?
As an employer, you need to be sure that no part of your employee agreement violates the ESA. Not only do you run the risk of nullifying your entire agreement, but let’s face it, if you have to go to Court the Court will be looking for ways to help the employee. So help yourself, and make sure your employee agreement will hold up.
Robin K. Mann, Associate Lawyer