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Taking Care of Business Law

Jul 14, 2020

One strike and you're out: ONCA rules that termination provisions must be read as a whole and that a severability clause cannot remedy a provision that is void

Over the past few years, the courts in Ontario have released a number of decisions which have affirmed the onus on the part of employers to draft legally compliant employment agreements.

The courts have strictly interpreted employment agreements, and the principles of interpretation used by the courts in assessing provisions in the employment agreements heavily favour employees, particularly in respect of provisions which attempt to limit the employee’s common law entitlements upon termination.

2020 is no exception as we have seen in the Ontario Court of Appeal’s (“ONCA”) recently released decision in Waksdale v Swegon North America Inc. This decision has the potential to impact a significant number of businesses for years to come.

It is also a reminder to employers of the importance of consulting with legal counsel when drafting employment agreements to ensure that they are consistent with the current laws. It is also equally important for employers to review their existing employment agreements with legal counsel to ensure they account for legal developments and their impact thereon.

The Decision

Like many other employees, Mr. Waksdale signed an employment agreement when he began his employment with Swegon. The employment agreement included “termination with notice” and “termination for cause” provisions which were found in separate sections of the employment agreement.

As is most often the case, there was also a severability clause in the employment agreement, which aimed to allow a court to sever any illegal clause from the rest of the employment agreement.

Unfortunately, Mr. Waksdale was terminated without cause after approximately eight months of employment. Upon termination, he sued Swegon for wrongful dismissal.

On motion for summary judgment, Mr. Waksdale argued that the termination for cause clause in the employment agreement was void because it was an attempt to contract out of the minimum standards for notice under the Employment Standards Act (“ESA”).

Swegon conceded this point, but argued that the termination with notice provision on which it terminated Mr. Waksdale was valid and as such, the validity of the termination for cause provision was irrelevant. The motion judge dismissed the motion and the action after concluding that the termination with notice clause was stand-alone and enforceable.

On appeal, the question was whether the two termination clauses should be considered separately or whether the illegality of the one impacts the enforceability of the other. The ONCA held that the illegality of one tainted the other; the fact that the employer did not rely on the termination with cause provision was irrelevant and the termination provision was not saved by the severability clause.

Key Takeaways for Employers

First and foremost, while courts will enforce a rights-restricting contract, they will not enforce termination provisions that are, in whole or in part, illegal. As the ONCA set out, an employment agreement must be read together and interpreted as a whole – it does not matter if termination provisions are contained in separate parts of the employment agreement and do not appear to be linked. If any portion of the termination provisions is an attempt to contract out of the ESA, then it will be entirely void.

Secondly, it does not matter if the employer ultimately relies on the clause of the employment agreement which is the source of the contravention. The enforceability of the employment agreement is determined at the time it was executed, not at termination, and it is the wording of the provision by which the courts determine enforceability, rather than the actions of the employer. The courts will not allow employers to enjoy the benefit of an illegal provision even if it does not ultimately come into play.

Finally, the courts will not apply a severability clause to rid the employment agreement of the void termination provision. The ESA is remedial legislation and the courts favour an interpretative approach which encourages employers to draft employment agreements that comply with the minimum requirements of the ESA. There would be little incentive to do so, however, if the courts simply allow for the severing of an offending provision.

Key Takeaways for Employees

It is important for employees to consult with legal counsel to understand their rights and entitlements at the outset of the employment relationship and after having been terminated from employment. While employers are concerned about the ever-changing legal landscape, employees may actually gain opportunities to challenge provisions in their employment agreements which seek to limit their rights and entitlements.

Employees should not simply assume, or rely upon the employer's opinion that, the terms of the agreement are valid and reflective of the current laws. The onus is on the employer to make an enforceable agreement and one unenforceable provision may have an impact on the others.

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