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Enforceability of termination provisions: Employers take note

Canada Publication January 25, 2021

On January 15, the Supreme Court of Canada denied an application for leave to appeal from the Ontario Court of Appeal’s decision in Waksdale v Swegon North America Inc. By doing so, the Supreme Court has left in place a decision that many believe will make it more difficult for employers to rely on the termination provisions in an employment agreement.

Background

In Waksdale, the employee’s employment was terminated without cause and he was provided with entitlements upon termination as set out in his employment agreement – entitlements that exceeded the minimum requirements of the Employment Standards Act, 2000 (ESA). The employee brought a claim against his employer alleging the termination provision did not comply with the ESA, therefore was unenforceable and did not limit his entitlements to reasonable notice at common law.

The employment agreement in question contained two provisions relating to termination: one that pertained to termination without cause and one for termination with cause. The without cause termination provision provided for more than the minimum statutory requirements and, on its own, otherwise complied with ESA requirements. The employer conceded that the termination with cause provision violated the ESA and was therefore unenforceable.

In defending the claim, the employer relied on the without cause termination provision it had complied with and that provided more than the statutory minimums to termination and severance pay. The employee argued that while the without cause termination provision may have been valid and enforceable, it must be interpreted in the context of the agreement as a whole, including the provision pertaining to termination with cause. Since the termination with cause provision was invalid and unenforceable, so too was the without cause termination provision.

The trial judge ultimately agreed with the employee, holding that the without cause termination provision must be read in the context of the agreement as a whole. Since the agreement allowed for termination in circumstances that were not compliant with the ESA, namely the termination for cause provision, then the entire agreement was unenforceable to the extent that it sought to limit the employee’s common law entitlements upon termination. 

The Court of Appeal upheld the trial judge’s decision, and the Supreme Court of Canada denied leave to appeal from the Court of Appeal’s decision.

Key take-aways

In considering the implications of the Waksdale decision, it is important to note the employer in this case had conceded that the termination with cause provision was invalid and unenforceable. Despite what many have suggested, the decision does not necessarily mean any employment agreement with a provision entitling an employer to terminate an employee for cause and without notice is a violation of the ESA and therefore unenforceable. For an analysis of the potential implications of the Court of Appeal’s decision in Waksdale, we refer you to our previous publication on the subject. 

The decision in Waksdale does, however, affirm the court’s approach to strictly interpreting termination provisions in employment agreements. As is made clear in Waksdale, if any element of an employment agreement has even the potential of violating the ESA with respect to entitlements upon termination and severance, the entire employment agreement will be deemed unenforceable as it relates to termination and the employee will be entitled to reasonable notice at common law.  

While Waksdale involved an Ontario employer and the interpretation of an Ontario statute, it does have implications for employers across the country. The principles relied on by the court in Waksdale for interpreting termination provisions in employment agreements are not unique to Ontario. Therefore, employers across the country should consider this decision’s implications and whether their employment agreements comply with the provisions of the relevant employment standards legislation in the province in which they operate.

The fact the Supreme Court denied leave to appeal in Waksdale may not, in and of itself, have created new law. It does, however, mean the Court of Appeal’s decision is here to stay and along with it claims from employees and their counsel about its far-reaching implications. Employers are therefore wise to review their employment contracts for compliance and prepare themselves to defend any such claims. 



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