In an earlier blog post, we covered the Ontario Court of Appeal significant decision called Waksdale v. Swegon North America (“Waksdale“). In this case, the court effectively wiped out the legal validity of many employment contracts across Ontario.
What is the Waksdale Case All About?
In Waksdale, the court released a decision that had a massive impact on how employers must draft employment contracts – and whether many of the current ones in force are legally enforceable (valid).
In Waksdale, an employee was let go from his job after spending over 10 years of service with the company. Since his employment was terminated “without cause,” his employer offered him a severance package consisting of only two weeks of pay in lieu of notice, and relied on an employment contract the employee had signed justifying this minimum amount of financial compensation. Not satisfied with his employer’s severance package offer to him, the employee sued his employer for wrongful dismissal.
In the employment contract, there were two “provisions” (paragraphs) that governed the circumstances and consequences of how the employer could terminate his employment – namely, a termination with cause and a termination without cause. While the employer agreed that the first provision (termination with cause) was illegal because it failed to following the minimum legal requirements in the Ontario Employment Standards Act, 2000, S.O. 2000, c. 41 (“ESA”), it argued this was irrelevant, since it was only relying on the other provision (termination without cause) to terminate the employee’s job, which itself was valid and enforceable.
While the lower court agreed with the employer, on appeal, the higher court disagreed. In fact, it found that both provisions (termination with cause and termination without cause) were illegal and unenforceable.
Most importantly, the court confirmed the general rule when interpreting employment contracts is that it must be read “as a whole” – rather than “not a piecemeal basis.” Therefore, if a particular section of an employment contract (e.g., termination of employment) is split into two or more provisions, if any one of those provisions illegal, all of the other provisions making up the section entire section is illegal. According to the court:
“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.”
Again, all of the paragraphs in an employment contract’s termination provision must be read “as a whole.” Therefore, in this case, since the “termination with cause” provision is illegal, even the “termination without cause” is illegal – and it does not matter that they are found in different paragraphs of the employment contract, nor does it matter whether the employer is relying on only one part of the termination provision and not the other.
The Waksdale Decision Followed by the Ontario Courts
In law, the courts are generally required to follow a rule called “stare decisis,” which is Latin for “to stand by things already decided.” This is commonly referred to as “legal precedent.” In short, it means that a court will usually defer to (follow) a previous court’s decision that has settled the same issues in dispute. This is important, because it promotes predictability in the law through consistent court decisions. In the area of employment law, where there are often many wrongful dismissal disputes, this plays an extremely important role.
It is therefore to be expected that once Ontario’s highest court (Court of Appeal) makes a decision, the lower courts will soon follow. This is precisely what happened in the recent case of Sewell v. Provincial Fruit Co. Limited (“Sewell“) , which followed (and applied) the Waksdale decision to resolve a similar wrongful dismissal claim.
In Sewell, the employee brought a wrongful dismissal claim against their employment after their employment was terminated without cause after less than one year. Once again, the employer relied on an a termination provision in the employee’s employment contract to provide him with a severance package of only two weeks of pay and benefits.
Similar to the Waksdale decision, the employee’s employment contract in Sewell contained two provisions related to termination – one covering “termination with cause” and the other covering “termination without cause.” As was the case in Waksdale, the employer in Sewell again argued the termination provisions were both valid, since it was not relying on the “with cause” provision in order to terminate the employee’s job. As noted above, all paragarphs in an employment contract regarding the same topic must be read as a whole, and must all set aside if one or more of the terms are illegal – even “if the offending term is not at issue” (relied on) by the employer.
In court, the judge agreed with the employee, and applied the court’s previous ruling in Waksdale, stating that the employment contract must be examined “as a whole.” The judge found that the employment contract violated the minimum standards set out in the ESA for the same legal reasons set out in Waksdale, and therefore could not be used to limit the employee’s severance pay entitlements at termination.
So Why Was the Termination Provision in Sewell Illegal?
Two reasons:
1. The “Termination for Cause” provision violated the ESA‘s requirement that an employer must provide notice of termination, except in rare cases where the employee engages in “willful” (intentional) misconduct. Here, it allowed the employer to terminate his employment “at any time and without any notice or any further compensation for just cause” – which is too broad and did not meet the required legal standard in the ESA.
2. The “Termination Without Cause” provision violated the ESA‘s requirement that an employer provide all of the following: (a) notice of termination, (b) benefits continuance and (c) severance pay (if applicable). Despite its obligation, the termination without cause provision took a short cut by attempting to combine the employer’s notice of termination and severance pay requirements as one payment, instead of two separate payments.
As the court’s decision in Sewell demonstrates, the courts will generally follow previous court decisions (especially decisions from high courts). This is important in the area of employment law, where many wrongful dismissal claims often turn on similar facts (e.g., the age of the employee, their type of job, years of service, etc.).
Most importantly, this court decision shows how incredibly important it is for employers (and employees) to carefully review the terms of employment contracts. One of the policy reasons the courts rely on to scrutinize employment contracts to determine if they are legally valid is protecting the employee’s rights, dignity and livelihood of employee’s, specifically by ensuring employers follow all legal rules when attempting to define the relationship in an employment contract. Where the employer fails to do so, the courts will readily step in to provide all of the employee’s employment law entitlements, including a severance package.
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