It is typical in any wrongful dismissal claim for an employee to challenge a termination clause relied on by an employer in an employment contract as illegal and unenforceable. If they succeed, the employee would likely be entitled to significantly more financial compensation as part of a severance package. The most typical reasons employees use to argue that a termination clause is invalid include:
- does not comply with the Ontario Employment Standards Act, 2000 (that is, it attempts to contract out of basic minimum employment standards, especially termination pay or severance pay)
- the language in the termination clause is vague or ambiguous
- allows an employer to terminate an employee’s job “for cause” without providing notice of termination (or a severance package) for illegal reasons
In this blog article, we focus on a few of the court cases that followed the landmark case of Waksdale v. Swegon,2020 ONCA 391, which made it clear that all paragraphs in an employment contract dealing with an employee’s termination rights and entitlements will be read together as a whole and constitute a termination clause. Most importantly, and if any of those paragraphs making up the termination cause is found legally unenforceable, a judge will likely find that the termination clause being struck down. As a result, an employee successful in a wrongful dismissal claim will be awarded significant severance package compensation.
Basic Principles in Employment Contracts and Termination Clauses
Under Ontario employment law, there is a common law presumption that an employer can only terminate an employee’s job without cause if they first provide them with reasonable notice (the aim being to allow them time to seek new employment). That presumption can be rebutted if there is an employment contract which clearly specifies some other period of notice of termination” (Machtinger v. HOJ Industries Ltd.).
Employees are entitled to know at the beginning of an employment relationship what their employment will be at the end of their employment, and how and when it may be terminated with cause or without cause.
If the common law presumption of reasonable notice has not been clearly rebutted, then the employee is entitled to pay in lieu of notice for the reasonable period under the common law (that is, a severance package).
The Ontario Employment Standards Act, 2000 (“ESA“) sets minimum standards requirements or prohibitions that are different from an employee’s full legal entitlements under common law. Most importantly, this law prevents employers and employees from “contracting out” of or “waiving” any of those minimum employment standards. Some of these include how much prior notice of termination an employee must be given; payment of benefits during notice periods; and the payment of severance pay. The only time these employment standards cannot be contracted out of unless the contract is for a “greater benefit” – that is, if the employment contract provides more than the minimum standards.
If a termination clause in an employment contract attempts to contract out of an employment standard by providing less than the minimums required by the ESA, a court will find it illegal and unenforceable if it is challenged by an employee in a wrongful dismissal claim. In that case, a court will find the entire termination clause illegal possible, and it does not matter whether the employer eventually pays out all of the employee’s statutory entitlements after termination. For instance, if a termination clause says the employer only needs to provide an employee with 2 weeks of termination pay, and the employer actually ends up paying 4 weeks of termination pay, a court will still find the termination clause illegal and unenforceable. Accordingly, the enforceability of a termination clause is determined by the wording of the clause alone, not by an employer’s conduct after termination.
Recent Caselaw
Lamontagne v. J.L. Richards & Associates Limited
The termination clause stated:
“Employment may be terminated for cause at any time, without notice.
In the event that employment is terminated for any other reason, it is understood that you will have no entitlement to common law notice of termination. However, you will be provided with notice of termination or pay in lieu thereof and, if applicable, severance pay, both in accordance with the Employment Standards Act of Ontario or any successor legislation. With respect to notice of termination or pay in lieu thereof, it is understood that the minimum period of notice or pay in lieu thereof specified in the Act will be provided and will constitute your complete entitlement to notice or pay in lieu thereof.”
What the court decided:
- an employment contract’s “for cause” provision violates the ESA and was found illegal as it incorporates the common law “just cause” concept, which meant that an employee could be terminated without any notice for conduct that is not “willful” or “bad on purpose”. This was an attempt to contract out of the minimum standards prescribed by the ESA and invalidated the entire termination clause. It did not matter what the employer might have done – the wording is what must be considered.
-
the “termination without cause” provision violates the ESA and was found invalid because it contained “all-inclusive” or “complete entitlement” language that attempted to contract out of the employer’s requirement to pay the employee’s health benefits and bonuses during the period of notice.
Sewell v. Provincial Fruit Co. Limited
The termination clause stated:
b) Termination by the Company for Just Cause
The Company is entitled to terminate your employment at any time and without any notice or any further compensation for just cause and the Company will not have any further obligations to you whether at contract, under statute, at common law or otherwise.
c) Termination by the Company without Just Cause
(A) The Company will be entitled to terminate your employment at any time without just cause by providing you with the following:
…
(ii) a payment, or at the Company’s sole option, notice or combination of notice and pay in lieu of such notice representing termination pay and, if applicable, severance pay, as may be required under the Employment Standards Act, 2000, as amended from time to time (the “Separation Period”);
What the court decided:
- the “termination for just cause” provision of the employment contract was illegal because it contracted out of the ESArequirement to provide notice of termination except in cases where an employee engaged in “willful misconduct.” In this case, the employment contract’s entire termination clause must be read as a whole and thrown out since one of the related paragraphs is illegal (even though the offending term was not at issue in the instant case). As such, the employee was entitled to common law reasonable notice.
- the “termination without cause” provision in the employment contract violates the ESA because it combines the employer’s requirements notice of termination (or termination pay) and severance pay entitlements (which must each be paid separately).
Livshin v. The Clinic Network Canada Inc.
The termination clause stated:
“c) Termination by the Company for Just Cause – The Company has the right, at any time and without notice, to terminate your employment under this Agreement for just cause.”
What the court decided:
- the “termination without cause” provision in the employment contract violates the ESA because it combines the employer’s requirements notice of termination (or termination pay) and severance pay entitlements (which must each be paid separately)
- under O. Reg. 288/01, s. 2(1) of the ESA, an employer can only withhold termination pay, severance pay and the continuation of relevant benefits in response to workplace conduct that amounts to “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”
- the narrower ESA standard justifying denial of notice of termination or compensation is more strict than the lower standard under common law “just cause”, which is illustrated by the example of an employee’s incompetent performance. Under some circumstances, incompetence might provide a basis for “just cause” under common law, but not under the ESA‘s more stringent standard
- the “termination without cause” provision in the employment contract violates the ESA because it combines the employer’s requirements notice of termination (or termination pay) and severance pay entitlements (which must each be paid separately)
- there is no attempt in the employment contract to differentiate between the relevant standards, or to specify circumstances which may trigger “just cause” at common law but do not trigger the ESA standard
- the “termination without cause” provision in the employment contract violates the ESA because it combines the employer’s requirements notice of termination (or termination pay) and severance pay entitlements (which must each be paid separately)
- the termination for “just cause” provision contravenes the ESA it renders all other provisions in the employment contract unenforceable, including the termination “without cause” provision. This rule applies whether or not the “without cause” provision is itself, when read in isolation, compliant with the ESA, and even when the employer does not invoke the offending “just cause” provision in dismissing an employee
Ojo v Crystal Claire Cosmetics Inc.
The termination clause stated:
“Termination
Crystal Claire maintains the right to terminate your employment at any time and without notice or payment in lieu of thereof, if you engage in conduct which constitutes just cause for summary dismissal.
In the absence of just cause, Crystal Claire may terminate your employment at any other time and for any reason upon providing you with either advance notice and/or applicable payments equivalent to the minimum applicable entitlements contained within the ESA, as amended. For greater certainty, Crystal Claire’s maximum liability to you for common law notice, termination pay, severance pay, or payment in lieu of notice shall be limited to the payment of the amounts specified in the ESA.”
What the court decided:
- the termination for “just cause” provision contravenes the ESA because it allows the employer to not provide notice of termination where they employee has not engaged in ‘willful misconduct.’
- The termination clause is illegal because it allowed the employer to only pay the employee’s minimum termination pay, but not to continue paying the value of his benefits during the minimum notice period required by the ESA.
Henderson v. Slavkin et al.
The termination clause stated:
“18. Conflict of Interest. You agree that you will ensure that your direct or indirect personal interests do not, whether potentially or actually, conflict with the Employer’s interests. You further covenant and agree to promptly report any potential or actual conflicts of interest to the employer. A conflict of interest includes, but is not expressly limited to the following:
A failure to comply with this clause above constitutes both a breach of this agreement and cause for termination without notice or compensation in lieu of notice.
19. Confidential Information.
In the event that you breach this clause while employed by the Employer, your employment will be terminated without notice or compensation in lieu thereof, for cause.
This provision shall survive the termination of this Agreement.”
What the court decided:
- “it is the position of the plaintiff that clause 19 defines confidential information and forbids its disclosure, with termination for cause being the penalty for the breach. However, the clause does not stipulate that any misconduct must be wilful and not trivial to support a termination without notice, as required by the ESA.
- In this case, it is not clear in what circumstances the disclosure of confidential information may occur without immediate termination for cause without notice. One can conceive of a situation where confidential information may have been inadvertently disclosed in a situation where it is not wilful and/or where it is a trivial breach. This clause does not respect the ESA provisions in this regard.
Take-Away Lessons
The important point for employers to keep in mind is that an employment contract termination clause must be drafted carefully in a way that ensures each clause complies with Ontario employment law. As recent caselaw demonstrates, even if seemingly unrelated clauses attempt (or could be interpreted as) attempting to contract out of employment standards legislation, it is likely that a court in a wrongful dismissal claim will find it legally unenforceable. In that case, the employer will not be able to rely on the employment contract termination clause to limit an employee’s financial severance package entitlements.
Because Ontario employment law is always changing, employers should always ensure they obtain specific advice on each employment contract they are drafting to ensure that any termination clause is well drafted, easy to understand and complies with employment standards legislation. As the recent court cases demonstrate, when employers fail to ensure they have legally compliant employment contracts, they will likely end up owing an employee significant severance pay compensation.
Contact Employment Lawyer Today
If you are an employer who would like to know your options before terminating one of your employees, or an employee who has recently lost your job and would like to know if you have the right to sue your employer for wrongful dismissal or negotiate your severance package, our experienced employment lawyer at Bune Law can help. Contact us by phone 647-822-5492 or fill out the contact form to the side. We would be happy to assist in your employment law matter as quickly as possible.
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