“You’re Fired” Under Fire: What Employers Need to Know About Termination Clause Enforceability

While employers enjoy some flexibility in making decisions about an employee’s job, there are a number of obligations that apply to the termination of employment. Generally, where an employer terminates the employment relationship, that employee is presumptively entitled to reasonable notice of the termination of their employment at common law (or pay in lieu thereof). The common law entitlement to reasonable notice generally exceeds the statutory entitlements under the Employment Standards Act, 2000 (the “ESA”), and in some cases does so by a significant amount.

In Ontario, this presumption is rebuttable, but only where there is an enforceable employment contract in effect between the parties whereby the parties agree to contract out of the common law notice period by providing for some other, usually reduced, period of notice, commonly referred to as a “ceiling clause”. Such provisions cannot provide for less than the minimum standards set out in the ESA, and the intention to displace common law notice must be expressly or impliedly clear.

Since the decision of the Supreme Court of Canada in Machtinger v. HOJ Industries Ltd. in 1992, there have been a number of cases over the years that have made their way to the Ontario Court of Appeal which involved ceiling clauses being attacked on the basis that they failed to comply with the ESA in some respect, or did not rebut the common law in sufficiently clear language. In general, these cases clarified the prevailing jurisprudence that ceiling clauses need to be properly structured in order to rebut the common law presumption of reasonable notice.

For example, in Amberber v. IBM Canada Ltd., the Court enforced a ceiling clause against an employee seeking reasonable notice at common law. The Court held that through “failsafe” language within the termination clause, there was no situation in which the clause could run afoul of the ESA. Furthermore, the intention to rebut the common law was unequivocal, and when the termination provisions of the employment contract were read holistically,  the ceiling clause did not violate the ESA.

However, the Court of Appeal of Ontario’s recent decision in Waksdale v. Swegon North America Inc. marks a substantial development in the law respecting the enforceability of termination and ceiling clauses in employment agreements. As a result, all employers in Ontario should invest in reviewing their employment agreements to ensure they remain enforceable.

The Facts

Benjamin Waksdale (“Waksdale”) was hired by Swegon North America Inc. (“Swegon”) as its Director of Sales, but was terminated without cause after only eight months. Shortly after his termination, Waksdale commenced an action for wrongful dismissal.

The parties had entered into an employment agreement that included a ceiling clause providing that, on termination without cause, Waksdale would be entitled to one week’s notice or pay in lieu of notice in addition to the minimum notice or pay in lieu of such notice and statutory severance pay under the ESA.

In addition, the employment agreement contained a separate “for cause” termination provision, which listed scenarios that purported to justify dismissal for cause without notice. Several of the listed scenarios did not meet the level of misconduct sufficient to warrant dismissal for cause (that is, without reasonable notice) pursuant to the regulations pertaining to termination and severance of employment under the ESA.

The agreement also contained a clause rendering any illegal clause severable from the rest of the agreement. As such, Swegon conceded that the “for cause” termination provisions were unenforceable.

The Motion for Summary Judgment

Swegon sought summary judgment to dismiss the action. Waksdale asserted that the unenforceable clause rendered the entire agreement void.

The Court allowed the motion for summary judgment, finding that the ceiling clause that applied to a without-cause termination was a stand-alone clause and was enforceable without reference to the clause that applied to a termination for cause. As such, the Court found that the ceiling clause applied and there were no grounds to challenge its enforceability.

The Court held that Swegon acted within its rights under the employment agreement and paid Waksdale two weeks’ severance pay and a car allowance. While that was less than what he would receive at common law, it was more than the minimum under the ESA. Simply put, the Court found that there was no genuine issue requiring a trial and the action was dismissed.

The Appeal

The Ontario Court of Appeal overturned the lower court’s decision, ruling that it was irrelevant whether the termination provisions were all found in one place in the agreement or separated, or whether the provisions are linked.  Instead, the Court of Appeal outlined that a contract’s termination provisions must be read as a whole, and not considered on a piecemeal basis.  Therefore, because the “for cause” provision was in breach of the ESA,  all of the termination provisions contained within the employment agreement, including the ceiling clause that applied to a without-cause termination, were considered null, void, and unenforceable for all purposes. In other words, if the termination provisions of your employment agreement contain a provision that violates the ESA, a ceiling clause that would be enforceable in isolation is likely to be found to be unenforceable.

In addition, the Court of Appeal refused to give any effect to the severability clause, opining that a severability clause cannot have any effect on clauses of a contract that have been made void by statute. 

On January 14, 2021, the Supreme Court of Canada denied Swegon’s request for leave to appeal the decision. Therefore, the Court of Appeal’s decision will be the law in Ontario for the foreseeable future.

What Can Employers Do?

The Court of Appeal’s decision likely has far-reaching consequences for employers in Ontario. Employers should seek the advice of an experienced employment lawyer to ensure that the termination provisions contained within their employment agreement do not violate the ESA. Additionally, although Waksdale and Swegon involved a with-cause termination clause that offended the ESA, a hard look should be taken at the entire agreement to ensure that it is ESA compliant in all respects. Doing so is inexpensive and pays substantial dividends at termination time – the difference between an employee with an enforceable termination provision versus one without could amount to months, or even years, of notice pay.

If the termination provisions in your company’s contracts could result in a similar challenge, you should consider changes to your existing agreements. If a change is made unilaterally by an employer, an employee may be able to sue for damages based on constructive dismissal. To avoid a claim for constructive dismissal you should acquire the consent of the employee in writing. To make the amendment legally enforceable, there must be an exchange of valuable consideration (such as a small monetary signing bonus).

If the employee rejects the proposed changes, the Ontario Court of Appeal in Wronko v Western Inventory Services Ltd. has stated that the employer has two options:

  • They may terminate the employee by providing appropriate notice and then offer re-employment to the same employee on the new terms.
  • They may accept that there is no agreement to the proposed changes and continue the employment agreement with its existing terms and without termination.

All Ontario employers must proceed cautiously when asking an existing employee to sign a new or amended employment contract. This is not something that calls for a “DIY” fix. A misguided approach may result in an unenforceable contract, or worse, a costly claim of constructive dismissal.

The knowledgeable employment lawyers at Duncan, Linton LLP guide clients through the risks and obligations inherent in employment relationships. Our goal is to build strong, long-term relationships with each of our clients, work with them to identify their specific goals and achieve their desired results. Contact us online or call 519-886-3340 to make an appointment with one of our lawyers.