SCC Denies Leave to Appeal from Ontario Decision Voiding More Employment Termination Clauses
In Ontario, one invalid termination clause in an employment contract will now render all of the contract’s termination provisions void.
In Waksdale v Swegon North America Inc., 2020 ONCA 391 [“Waksdale”], the Ontario Court of Appeal (“ONCA”) held that “with cause” and “without cause” termination clauses can no longer be treated separately when assessing whether an employer has legally restricted an employee’s entitlement to reasonable notice of dismissal. Many employment lawyers described this as the most impactful employment law decision of 2020. Despite the controversy, on January 14, 2021, the Supreme Court of Canada (“SCC”) denied the employer leave to appeal (SCC 39326), cementing the law in Ontario. However, the debate continues over whether Waksdale takes employment law in a new direction or simply represents a principled extension of the existing jurisprudence on termination clauses.
Employment Contracts and Reasonable Notice of Termination
At common law, an employee is presumptively entitled to reasonable notice of termination where they are dismissed without cause (i.e., laid off). The exception is where the parties have validly contracted out of the common law. Employers often seek to restrict employee termination entitlements to the minimum required by the Employment Standards Act, 2000, SO 2000, c 41 [ESA]. But section 5 of the ESA explicitly prohibits contracting out of any minimum standard except by providing a greater right or benefit. The SCC held in Machtinger v HOJ Industries Ltd.,  1 SCR 986 [Machtinger] that if a without cause termination provision does not comply with the ESA, it will be void (rather than read down) and the employee will be entitled to common law notice. This encourages employers to draft compliant contracts rather than allowing them to benefit from illegal terms.
The ONCA has applied Machtinger strictly in recent years. For example, in Wood v Fred Deeley Imports Ltd., 2017 ONCA 158, the Court held that any termination clause must unequivocally comply with the ESA at the time of contracting, and not simply upon termination. Similarly, in Covenoho v Pendylum Ltd., 2017 ONCA 284, the Court reasoned that such a clause must satisfy the ESA under all possible circumstances, even if the employer ultimately pays the statutory minimums. Furthermore, judges must interpret termination clauses as a whole rather than subdividing them into their constituent parts: Amberber v IBM Canada Ltd., 2018 ONCA 571.
While the law on without cause provisions is relatively clear, a less-litigated issue is the relevance of terms governing dismissal for “just cause” (i.e., sufficiently serious misconduct). Many employment contracts state that no notice will be provided in such situations. However, O. Reg. 288/01 (Termination and Severance of Employment) provides that an employee will not receive ESA termination or severance pay if they are “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” Various adjudicators have held that this threshold is more onerous for employers than just cause because it implies intentional or deliberate conduct (although some commentators have challenged that definition). On this basis, at least two Superior Court decisions have found that an employee who was terminated for just cause was still entitled to statutory notice.
A further implication is that a term stating an employee will not receive notice of “dismissal with cause” may be invalid because it fails to account for scenarios where an employer establishes just cause short of wilful misconduct. The question in Waksdale was whether an invalid with cause provision has any impact on a separate, otherwise-valid without cause term.
Waksdale v Swegon: A Classic Wrongful Dismissal Dispute
Benjamin Waksdale (“Waksdale”) worked for eight months as a Director of Sales for Swegon North America Inc. (“Swegon”), an HVAC company. He was terminated without cause in October 2018 and the employer, relying on its employment contract, paid him two weeks’ notice—one week more than Waksdale’s minimum ESA entitlement. The contract contained separate termination clauses for dismissal with and without cause. It also contained a severability clause providing that if any term was invalid, the remainder of the contract would be saved. Waksdale nevertheless sued for wrongful dismissal, alleging that the contract was invalid and seeking six months’ pay-in-lieu of notice. Both parties moved for summary judgment of the dispute.
Superior Court of Justice: Termination Provisions are Read Separately
In Waksdale v Swegon North America Inc., 2019 ONSC 5705, Justice Morgan dismissed Waksdale’s claim. The parties agreed that the without cause provision was valid. In contrast, Swegon conceded that its with cause provision was invalid because it contravened the ESA. While the court did not reproduce the clause or otherwise explain why this was the case, the most likely explanation is that it did not account for the “wilful misconduct” standard in statutory terminations.
Waksdale argued that the invalid clause rendered the entire employment agreement unenforceable (or at least both termination provisions). In response, Swegon argued that the with cause term was irrelevant because the two provisions operated independently and Waksdale was terminated without cause. Alternatively, the illegal provision could be severed.
In ruling for Swegon, Justice Morgan found that, by its own terms, the with cause provision did not apply except where the employer pursued a termination with cause. Because the two provisions were separate and did not impact each other, there was no need to sever a standalone clause. This meant that the without cause provision remained in force and the employer had complied with its contractual obligations.
Court of Appeal: Termination Provisions are Read as a Whole
Waksdale appealed from the summary judgment. The Court of Appeal unanimously overturned the motion judge’s decision, finding that the contract’s termination provisions violated the ESA when read as a whole.
Swegon argued that where there are two discrete termination provisions applying to different situations, their validity should be assessed independently unless the terms are otherwise entangled in some way. The Court rejected this approach, explaining that, “An employment agreement must be interpreted as a whole and not on a piecemeal basis” (Waksdale, para 10). This means it is irrelevant whether or not the termination provisions are located together in one clause or otherwise linked. If a contractual term in some way violates the ESA’s termination requirements, all elements concerning termination will be void.
The Court justified this approach with reference to the inherent power imbalance between employees and employers as well as the remedial nature of the ESA (Waksdale, para 10). Swegon’s urged interpretation could also lead to mischief because even if an employer does not rely on an illegal clause upon dismissal, it may still benefit if an employee is under the impression they must follow the provision during employment (in this case, to avoid dismissal for cause) (Waksdale, paras 11–12). In the Court’s view, this was simply another incident of the principle that termination clauses must be assessed based on their legality at the time of contracting.
Under this approach, the motion judge erred by failing to read the two termination clauses together in light of their combined effect. This also meant that the saving clause was inapplicable because a term voided by the operation of the ESA will not be severed (Waksdale, para 14). Waksdale was therefore entitled to common law notice. The Court of Appeal remitted the case back to the lower court to assess the appropriate notice period.
New or Old Trend in Interpreting Employment Contracts?
Many lawyers have suggested that Waksdale requires most Ontario employment contracts to be rewritten. This is because few “with cause” provisions currently distinguish between just cause and the ESA’s wilful misconduct standard. Previously, it was not thought that this would impact the validity of without cause provisions unless the two were inextricably linked. However, the Court of Appeal in Waksdale essentially said that they are always linked. This means that a single violation of the ESA can void all the termination provisions in a contract, opening the door to more employees claiming common law notice. Workers challenging contractual limits on termination will not be limited to finding errors in the without cause provisions.
Rather than an entirely new approach to employment contracts, however, Waksdale is better viewed as a belated recognition that more than without cause terms can violate the ESA. It is true that these are usually the most relevant in wrongful dismissal disputes. This has led most courts and lawyers to ignore just cause provisions before now. But there is no principled reason that the validity analysis should be restricted to one aspect of a contract since the ESA provides some protection for employees who are dismissed both with and without cause. In line with Machtinger, the Ontario case law on termination clauses clearly rejects contractual interpretations that allow employers to circumvent the ESA—including through strategic separation of terms or use of saving clauses. The Court of Appeal has now signalled that illegal contract language of any kind will not be tolerated.
Admittedly, Waksdale leaves some unanswered questions. First, it does not provide guidance on when courts will invalidate just cause termination clauses. For example, must contracts include the ESA’s wilful misconduct language to comply with the legislation? Second, if employment contracts are read as a whole, is this principle limited to the validity of termination clauses? Or if some other unrelated term contravenes the ESA (such as regarding hours of work), will that similarly render the termination provisions void? While Waksdale had argued for a broader approach to invalidating employment contracts, it appears this was not necessary to decide the case. However, we can expect employee-side counsel to raise such arguments again in the near future.