Termination Without Cause Provisions: Waksdale v. Swegon North America

Employment Standards Minimums vs. Common Law Severance |

Unless an employment contract provides otherwise, there is a default rule in Ontario employment law that allows an employer to terminate an employee’s job “without cause” – meaning no specific reason – only if they first provide the employee with prior “common law reasonable notice of termination” or “pay in lieu” (i.e., sufficient prior notice of their last day of work, or the equivalent in severance compensation). But determining how much prior notice of termination an employee is entitled to receive will depend on many factors, such as an employee’s:

age
years of service
position
likelihood of finding comparable employment

For example, a 58-year old managerial employee who is terminated from their employment with a company after 10 years of service, may generally be entitled to in the range of 10-12 months’ of prior notice (or the equivalent compensation as part of a Severance Package).

The Exception to Common Law – Termination Provision in an Employment Contract

An employer can rebut the default rule requiring it to provide an employee with common law reasonable notice by negotiating an appropriate “termination provision” in an employee’s employment contract. However, to be valid and enforceable, the employment contract must provide the employee with at least the minimum requirements under the Ontario Employment Standards Act, 2000 (“ESA”) – and nothing less.

Under the ESA, an employer must provide the following benefits to an employee if employment is terminated without cause:

all outstanding wages and vacation pay
one week of notice of termination / termination pay for each year of service (up to 8 weeks)
one week of statutory severance pay for each year of service (up to 26 weeks)
one week of health/pension benefits continuance for each year of service (up to 8 weeks)

Generally speaking, an employee stands to earn much more financially in a severance package if their employer is required to provide them with common law reasonable notice of termination, as opposed to an employment contract that properly limits an employee’s severance entitlements. This is a key reason why employers sometimes require an employee to sign an employment contract (and why employees should always review an employment contract with an experienced employment lawyer before it is signed).

Termination Without Cause and Wrongful Dismissal Claims

If an employee believes their employment without cause, they may be able to pursue a wrongful dismissal claim against the employer. What makes a dismissal “wrongful” is not the fact the employee’s job was ended (since an employer is allowed to do that, just like an employee is allowed to quit), but that the employer:

failed to provide prior reasonable notice or the equivalent in a severance package (in a without cause termination)
failed to provide the employee with the appropriate amount of reasonable notice or the equivalent in a severance package (in a without cause termination)
took the position it “cause” to terminate the employee without providing reasonable notice or the equivalent in a severance package, but could not justify its decision to do so

Termination Without Cause Provisions in Employment Contracts

Given the significant role a termination provision plays in determining how much financial compensation an employee is entitled to receive if their employment is terminated (in the form of either prior notice of termination, or a severance package), a key issue that is often at the centre of a wrongful dismissal claim is whether or not it is legally valid. In other words, does the wording of the termination provision meet the required legal standard to be lawful and effective?

While not expecting perfection, the courts have generally held employers to a very high standard in proving that a termination provision should be upheld to limit an employee’s severance entitlements. In fact, with some exceptions, the general trend has been that even a minor inaccuracy could make it unlawful, and thereby entitle the employee to common law reasonable notice.

The financial difference between the ESA minimum entitlements and common law entitlements in any given case can be significant.

For a general overview of some reasons where an employment contract termination provision was found legally invalid, please see our previous post.

The Case of Waksdale v. Swegon North America Inc.

In the latest important court decision, called Waksdale v. Swegon North America Inc, 2020 ONCA 391 (“Waksdale“), the Ontario Court of Appeal disqualified a termination provision in an employment contract because its language failed to meet the required legal standard.

In this case, a 42-year old employee worked for a company for 8 months as a Sales Director, earning an annual income of approximately $200,000. Prior to starting his job, he signed an employment contract that (like many others) set the following severance pay restrictions:

if his employment was terminated “without cause,” he would only be paid the minimum ESA requirements (see above)
in a different paragraph, if his employment was terminated “for cause,” he would receive nothing at all (not even the minimum ESA requirements)

After he was terminated from his employment, the employee brought a wrongful dismissal claim against his former employer, where he challenged the legality of the “for cause” termination provision, arguing he was entitled to common law reasonable notice.

The employee’s main argument in challenging the employment contract was essentially that there are two different standards for proving “cause” for termination in Ontario:

(1) “just cause” (common law standard)

(2) “wilful misconduct, disobedience, or wilful neglect of duty” (ESA standard)

While it is usually a tall order for an employer to prove an employee’s misconduct meets either standard to justify not giving them any prior notice of termination or severance compensation, it is even harder to prove the second ESA standard. Why? Because it effectively requires proving the employee’s misconduct was intentional.

In other words, under the ESA standard for denying notice of termination and severance pay, the word “wilful” essentially means an employer must prove some form of intention on the part of the employee underlying the misconduct.

For example, in Waksdale, the “for cause” termination paragraph would permit the company to terminate the employee without providing notice of termination or severance pay if it simply believed his performance was “unsatisfactory” and did not meet its standard. While this may be justified under the relatively less onerous common law standard (especially if it provided him with prior warnings and an opportunity to improve), it would likely not be justified under the ESA standard since proving poor job performance was “wilful” (or intentional) is extremely difficult.

This is why it is generally understood that the ESA standard for denying notice of termination/severance pay is much higher for an employer to meet than the common law standard. So, in the example above, it means an employee who cannot the expect performance standards set by an employer (i.e., they are simply not skilled enough) will generally not be considered wilful misconduct/intentional on their end to deny them the benefit of even minimum notice of termination or severance pay under the ESA. By contrast, an employer may be able to justify firing an employee for cause (no notice/no pay) under the common law standard for unsatisfactory job performance since they need not prove wilful misconduct/intention.

This distinction is important – and has significant consequences for an employee’s entitlements upon termination. Even if an employer can prove cause for termination under the common law standard, they may still not be able to prove the employee’s misconduct meets the relatively higher ESA standard requiring “wilful” misconduct to deny notice of termination and severance pay. As a result, the employee must still be paid the ESA minimums.

And that was the main reason the court found the termination provision in Waksdale unlawful: it would possibly permit the employer to avoid its legal obligation to provide minimum notice of termination and severance pay to the employee in circumstances where it was required to do so by the ESA.

Having found the termination “for cause” language of the employment contract was invalid, the court concluded all of the termination provisions as a whole were therefore invalid. Unlike similar cases, the court found it is irrelevant whether the “termination for cause” and “termination without cause” are found in one paragraph, or in two separate paragraphs. The termination language must be interpreted as a whole, not on a “piecemeal basis”:

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. In conducting this analysis, it is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are by their terms otherwise linked. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach without regard to their combined effect.

In other words, if either a termination for cause section or a termination without cause section is invalid, they will both be struck down by a court. As a result, if a termination for cause section is invalid, an employee terminated without cause will be entitled to common law reasonable notice – even if the termination without cause section properly limits the employee’s severance entitlements to the minimums under the ESA. Since some aspect of the termination language as a whole is invalid, the employer could not rely on part of it.

TAKEAWAY LESSONS

The Waksdale case has significant implications for most employers and employees in Ontario, and it is likely the case that most employment contracts may now be successfully challenged from another angle in wrongful dismissal cases.

If you are an employer and you wish to revisit your employment contract termination provisions by obtaining legal advice, please contact Employees who are terminated should consult with a lawyer for advice about their rights and entitlements.

If you are an employee adjusting to working remotely for your company and you would like to discuss changes your employer has proposed to your employment arrangement, including signing new employment contracts, feel free to contact Bune Law at 647-822-5492 to get legal advice regarding your specific rights and options.

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