Waksdale v. Swegon North America Inc.: Cause for Termination Clause Concern
January 20, 2021
By Malcolm Boyle, QC, Partner at McInnes Cooper,
Alex Warshick, Lawyer at McInnes Cooper
Termination clauses, particularly “without cause” ones, are among the most important clauses to include in any employment agreement. But the Ontario Court of Appeal’s June 2020 decision in Waksdale v. Swegon North America Inc. has caused employers across the country significant concern about the enforceability of such clauses. The Court decided a “for cause” termination clause void because it didn’t comply with Ontario’s minimum employment standards legislation, also rendered void a “without cause” termination clause, even though it was a separate clause and despite the presence of a severability provision in the contract. On January 14, 2021, the Supreme Court of Canada dismissed the employer’s appeal of the decision. The Court of Appeal’s decision therefore stands, setting a new precedent in Ontario – and effectively voiding many “without case” termination clauses in Ontario employment contracts.
The decision also causes considerable concern to employers in other jurisdictions, including Nova Scotia and Newfoundland and Labrador, where the termination notice exception wording in minimum employment standards laws is substantially similar to that in Ontario. Courts outside Ontario aren’t required to follow the Waksdale decision, but the Ontario Court of Appeal holds strong sway across the country. If other courts adopt the decision, most termination clauses in employment contracts could similarly be rendered void and unenforceable – resulting in significant employer liability. It’s prudent that every employer review and, if necessary, revise their employment contracts to mitigate the risk a court will find their termination clauses void and unenforceable. These five actions are key when reviewing and revising employment contracts in light of the Waksdale decision:
- Cause Standard. Ensure “for cause” termination clauses reflect the nuance between the common law (law made through judicial decisions) and the legislative standards for termination without notice. Until now, many employment contracts used boilerplate “for cause” terms that refer only to the common law standard; this now jeopardizes the enforceability of not only the “with cause” termination clause, but all termination provisions in the contract. These clauses should refer to the statutory standard.
- Separate Clauses. Make “for cause” and “without cause” termination clauses completely separate, not merely separate paragraphs in the same clause, to minimize the chance a court will read them together. This wasn’t determinative in Waksdale, but separating these clauses should reduce the chance a court will read them together.
- Severability Clause. Include a “severability” clause. While the employment contract in Waksdale included a severability clause, the Court of Appeal declined to apply it on the basis a severability clause can’t have any effect on contractual clauses made void by statute. However, including one remains prudent.
- “Saving” Provision. Include a “saving” or “failsafe” provision confirming that regardless of anything else in the contract, the employee is guaranteed to receive their entitlements under the applicable minimum employment standards legislation. The contract in Waksdale didn’t appear to include such a “saving provision”, so the court didn’t consider the effect such a clause would have had. Such a “saving” provision has already become best practice in N.S., and should be included in N.S. employment contracts given the effect of the right in section 71 of the S. Labour Standards Code (and its remedy: reinstatement).
- Statutory Compliance. Ensure all termination provisions in the contract comply with minimum employment standards legislation with respect to notice. Theoretically, the Waksdale decision could mean that non-compliance with minimum employment standards legislation in any clauses that typically include notice provisions, such as probationary periods or even employee resignation, could render all other termination provisions – including “without cause” termination clauses – void and unenforceable.
Employers must, however, take care changing the employment contracts of existing employees. Unilaterally changing a fundamental employment term or condition without giving the employee “consideration” (something of new value in exchange, and merely continuing their employment isn’t enough) or sufficient advance notice can make these new contracts unenforceable or might amount to constructive dismissal, entitling the employee to treat the contract as at an end on the basis the employer indicated it no longer intended to be bound by it.
Here’s a closer look at the contractual defect that voided the “for cause” termination clause, how the Ontario Court of Appeal interpreted the employment contract to ultimately void the “without cause” termination clause, and why the decision has wider implications.
The Contractual Defect
The defect rendering the contractual “with cause” termination clause void in Waksdale lies in the distinction between the legal standard for a termination for “cause” or “just cause”, a common law concept, and the standard for termination without notice under minimum employment standards legislation.
The Ontario Notice Exception. The Ontario Regulations on Termination and Severance of Employment provide an exception to an employee’s statutory entitlement to termination notice where the employee is found to have “been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.”
The Plester Decision. In its 2011 decision in Plester v. Polyone Canada Inc., the Ontario Superior Court confirmed that the common law standard of “cause” or “just cause” for termination is a lesser requirement for a termination without notice than the legislative standard. As a result, an employer could have cause at common law for not providing notice, and thus not be liable for common law reasonable notice, but at the same time have failed to meet the legislative standard for termination without notice, and therefore still be liable for notice under the Ontario Employment Standards Act. Because of this, the court in Plester found the contractual “for cause” clause at issue invalid and unenforceable because it contravened the minimum employment standards legislation entitlements by purporting to allow the employer to terminate without notice if it had common law cause, but had not necessarily met the statutory standard. Therefore, to terminate an employee under the Ontario minimum employment standards legislation without providing notice, an employer might require more than “cause” as understood in the common law. In many scenarios, what constitutes “cause” will meet the minimum standard in the legislation, but not always, which is why the court in Plester found the clause contrary to the statutory standard.
The Court’s Interpretation
Since the Plester decision, other Ontario employees have argued courts should void a contractual “without cause” termination clause because the “for cause” termination clause in the same contract was invalid. Until the Court of Appeal’s decision in Waksdale, these arguments were unsuccessful, including in the trial decision in Waksdale.
The Khashaba Decision. For example, in its 2018 decision in Khashaba v. Procom Consultants Group Ltd., the Ontario Superior Court agreed the “for cause” provision of a termination clause was void and unenforceable because it violated the employment standards legislation, but refused to also void the “without cause” provision, which was a separate paragraph but still in the same clause, because:
- Under rules of contract interpretation, the court should only remove the offending clause if the other clauses can stand on their own.
- The employment agreement contained a “severability” clause evidencing the parties’ intent that the court should sever or disregard any clause found to be illegal or unenforceable without affecting the rest of the contractual provisions.
- The termination clause included a “saving” or “failsafe” provision stating that in no event would the employee receive less than their minimum entitlements under the employment standards legislation.
The Waksdale Departure. In Waksdale, the employer conceded the “for cause” termination clause in the employment agreement violated Ontario employment standards legislation because it referenced solely the common law cause standard. However, the employer argued, as in Khasaba, that the separate “without cause” termination clause remained enforceable nonetheless because it was a separate clause, and the contractual severability provision allowed the Court to simply carve out the offending “for cause” termination clause. In a significant departure from Khasaba and earlier decisions, the Court of Appeal in Waksdale decided the termination provisions of an employment agreement must all be read together – so an invalidity in one termination clause renders all of the termination clauses in the contract unenforceable.
The Wider Impact
Courts outside of Ontario aren’t required to follow the Waksdale decision. But the Ontario Court of Appeal historically holds considerable persuasive sway across Canada. The Waksdale decision is of particular cause for concern for employers in jurisdictions in which the wording of the statutory exception to notice of termination entitlement, and thus the distinction to be drawn from the common law, is substantially similar to that in Ontario. Waksdale may open the door to demands and actions for common law reasonable notice of termination (or damages in lieu) based on alleged defects in the “for cause” provisions of employment agreements – even where the employment agreement otherwise properly contracted out of common law reasonable notice for a without cause termination. The result could be a flood of claims based on the Waksdale decision in provinces beyond Ontario, particularly as claims relating to terminations and lay-offs due to the COVID-19 pandemic make their way to the courts. Sooner rather than later, courts outside Ontario will be called on to consider this decision. In Atlantic Canada, the wording of the statutory exception to notice entitlement in comparable minimum employment standards legislation of N.S. and N.L. is substantially similar to that of Ontario:
N.S. & N.L. In Nova Scotia, the Labour Standards Code exception permits termination without notice where an employer finds an employee “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” In Newfoundland and Labrador, the Labour Standards Act exception to the obligation to give termination notice is even more specific, and is only permitted where, “the employee has wilfully refused to obey a lawful instruction of the employer, or has committed misconduct or been so neglectful of duty that the interest of the employer is adversely affected, or has otherwise been in breach of a material condition of the contract of service that in the opinion of the director or the Labour Relations Board considering and deciding a complaint made under this Act warrants summary dismissal”. Employee conduct constituting common law “cause” might often meet these statutory standards, but this isn’t necessarily always the case – even though these standards are sometimes used interchangeably. “Cause” is already, at common law, a difficult standard to meet; these employment standards minimums are even more specific and stringent.
P.E.I. & N.B. Meanwhile, however, no such distinction exists in Prince Edward Island and New Brunswick. The employment standards legislation in both provinces imports the common law standard and allows for termination without notice where “just cause” or “cause” exists.
Please contact your McInnes Cooper lawyer or any member of our Labour & Employment Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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