We had previously written about Waksdale v. Swegon North America Inc. [Waksdale], a major decision from the Ontario Court of Appeal released earlier this year, in which an employer’s “for cause” termination clause that did not comply with the minimum standards of the Employment Standards Act, 2000 [ESA] was held to void an otherwise legally enforceable “without cause” clause within the same employment agreement. The decision in Waksdale has rendered many termination clauses in Ontario unenforceable, and potentially those in other Canadian provinces. As a result, employers impacted by the decision are now exposed to far greater potential liabilities for employee termination entitlements.
Sewell v. Provincial Fruit Co. Limited [Sewell] is the first decision to have cited and applied the holding in Waksdale. In Sewell, the Ontario Superior Court of Justice (the “Court”) similarly invalidated a termination provision because of a problematic “for cause” clause.
Kevin Sewell, the plaintiff, was employed by Provincial Fruit Co. Limited (“Provincial Fruit”), the defendant, in a senior sales role for approximately six months. Mr. Sewell was subject to an employment agreement containing the following termination clauses:
b) Termination by the Company for Just Cause
The Company is entitled to terminate your employment at any time and without any notice or any further compensation for just cause and the Company will not have any further obligations to you whether at contract, under statute, at common law or otherwise.
c) Termination by the Company without Just Cause
The Company will be entitled to terminate your employment at any time without just cause by providing you with the following:
(ii) a payment, or at the Company’s sole option, notice or combination of notice and pay in lieu of such notice representing termination pay and, if applicable, severance pay, as may be required under the Employment Standards Act, 2000, as amended from time to time (the “Separation Period”);
It is agreed that upon compliance with the above provisions, the Company will be release from any and all obligations to you, whether statutory, under contract, at common law or otherwise.
Mr. Sewell’s employment was terminated without cause and Mr. Sewell was paid two weeks’ salary and benefits, more than required by the termination provision in his employment agreement and his minimum entitlements under the ESA. After Mr. Sewell’s dismissal, he brought an action for wrongful dismissal against Provincial Fruit and soon after brought a motion for summary judgment seeking, among other things, a declaration that the termination provision set out in the employment agreement was unenforceable, and damages for wages and other amounts he would have received during the common law reasonable notice period.
The Court found that the termination provision violated the minimum standards set out in the ESA and was therefore unenforceable. The provision breached the ESA by contracting around the requirements to provide both termination pay and severance pay and to provide notice except in cases where an employee engaged in “wilful misconduct,” as required by the ESA.
First, the Court found that the “without cause” clause allowed for the possibility of the employer providing working notice in lieu of severance pay, and thus contracting around the statutory requirement to provide payment of severance pay (where entitlement to severance pay has been made out). Under the ESA, if entitlement to severance pay has been established, the employer must provide for payment of both severance pay and reasonable notice or termination pay in lieu. Unlike termination pay, employees cannot be required to work through a notice period in lieu of severance pay. Rather, severance pay must always be paid out as a lump sum.
The Court also found that the “for cause” clause was in breach of the ESA by contracting around the requirement to provide notice except in cases where an employee engaged in “wilful misconduct”. Under the ESA, even if an employer has “cause” to terminate an employee under the common law standard, the employee remains entitled to their statutory termination entitlements unless their misconduct meets the higher standard of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” (for more information about the “wilful misconduct” standard, see our previous blog post).
Following Waksdale, the Court in Sewell read Mr. Sewell’s employment agreement as a whole and set it aside for the offending clauses. The Court awarded Mr. Sewell four months of common law notice.
Takeaways for Employers
Sewell is the first decision to apply and follow Waksdale, confirming that an offending termination clause will void the entire provision. Currently, leave to appeal to the Supreme Court of Canada is being sought on Waksdale. However, in the interim, employers can expect that Waksdale will be followed in Ontario and potentially in other Canadian provinces with similar “with cause” employment standards legislation that provides for a higher standard than the common law “cause” threshold.
Sewell and Waksdale may potentially invalidate many “standard” termination provisions in existing employment contracts. Employers should strongly consider reviewing their termination clauses and, where they are now unenforceable, should consider entering into new employment agreements with their employees in order to avoid the significant costs associated with common law notice entitlements for future terminations. In doing so, however, employers should be mindful that simply asking an employee to sign a new employment agreement is not sufficient to create a legally binding document. Employees must be provided with something of value, or “consideration”, in exchange for their agreement to sign off on new terms of employment. In the event the consideration requirement is not met, a fresh employment agreement with otherwise legally enforceable terms, will not be enforceable at law.
For more information or assistance in reviewing your existing employment agreements and/or in strategically implementing new and enforceable employment agreements in your workplace, contact our lawyers.
This blog is provided as an information service and summary of workplace legal issues.
This information is not intended as legal advice.