In the highly anticipated decision of Rahman v Cannon Design Architecture Inc. [Rahman], the Ontario Court of Appeal (“ONCA”) held that where a termination clause violates the Employment Standards Act, 2000 [ESA], it cannot be interpreted as complying with the ESA simply because the employee was sophisticated, had access to legal advice in negotiating the employment contract, and shared the employer’s subjective intention to comply with the minimum requirements of the ESA.
Ontario courts have generally held that where a termination provision in an employment agreement violates the ESA, not only will that provision be void and unenforceable; so too will the remaining termination provisions. However, where such an agreement was negotiated by a relatively sophisticated employee who had the benefit of legal advice, the courts have not consistently invalidated the ESA-offending provisions.
In the trial decision of Rahman, the Ontario Superior Court of Justice (“ONSC”) dismissed the employee’s wrongful dismissal action, and held that even though the “just cause” provision in the employee’s employment contract contravened the ESA, it did not invalidate the “without cause” provision because:
- the termination provisions were negotiated with the benefit of independent legal advice between reasonably sophisticated parties with relatively equal bargaining power;
- the negotiations resulted in improvements for the benefit of the employee in excess of the minimum standards under the ESA; and
- the offer letter expressed the parties’ mutual intention to comply with the ESA minimum standards.
One month later, in Livshin v. The Clinic Network Canada Inc., the ONSC held that the sophistication of the parties and presence of legal advice did not overcome the requirement that termination clauses must comply with the ESA. The ONSC reiterated well-established employment law principles, including that the ESA is remedial legislation intended to protect the interests of employees, and termination provisions should be interpreted in a manner that encourages employers to comply with the minimum requirements of the ESA. Accordingly, the unlawful just cause provision in this case was interpreted to invalidate the without cause provision, which would otherwise have been enforceable.
Rahman Decision Appealed
The ONSC’s inconsistent approach to the interpretation of employment contracts was ultimately addressed when the Rahman decision was appealed. The ONCA overturned the lower court’s decision, stating that it is the wording of a termination provision—and not the employee’s sophistication, access to legal advice, and the parties’ intention to comply with the ESA’s minimum requirements—which determines whether the provision violates the ESA.
The ONCA’s decision in Rahman makes clear that if a termination provision in an employment agreement violates the ESA, then all the termination provisions will be unenforceable, regardless of the circumstances in which the agreement is signed, including if the employee was relatively sophisticated, received the benefit of independent legal advice, or intended to receive only the minimum standards prescribed by the ESA.
Therefore, the key takeaways for employers from the Rahman decision are as follows:
- Employee Sophistication is Irrelevant. At times, the courts have considered the relative sophistication of employees in interpreting employment contracts, incentive compensation plans and related agreements. However, the Rahman decision confirms that an employee’s sophistication will not longer be treated as a relevant factor in interpreting termination clauses, and so termination clauses will be interpreted in the same manner for a CEO as for a part-time labourer—by considering whether it complies with the ESA.
- Independent Legal Advice is Not Determinative, But Still Important. It remains important to give employees the opportunity to obtain independent legal advice before signing an employment agreement because, without it, they may be able to argue that an otherwise enforceable agreement should not be enforced because it was signed under duress, without a full understanding of what was being signed. That said, in light of Rahman, the fact that an employee has received independent legal advice will not save a termination clause which violates the ESA.
- Employers Should Review Their Termination Provisions. Employers should ensure their just cause provisions do not deprive employees of their minimum termination entitlements under the ESA for conduct short of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”. They should also ensure their without cause provisions provide employees with no less than all their termination entitlements under the ESA, including notice of termination (or pay in lieu), benefits continuation and, if applicable, severance pay and bonuses.