More clarity on unfair termination clauses is welcome

A June decision in Waksdale v. Swegon North America Inc. by the Ontario Court of Appeal on the enforceability of termination clauses sent a seismic ripple across the employment law world, effectively rendering many of these clauses in employment contracts null and void. A month later, I was happy to represent a client in Sewell v. Provincial Fruit Co. Limited, an Ontario Superior Court case where the precedent established by Waksdale was first applied.

There are some valuable lessons to be learned from both decisions.

In Waksdale, the court ruled the “for cause” termination clause was unenforceable since it did not provide common law reasonable notice as demanded by the Employment Standards Act (ESA). All other termination provisions in an employment agreement are also void, the judgment deems, regardless of whether or not these provisions are separated within the agreement.

Agreements cannot be read on a ‘piecemeal basis’

“An employment agreement must be interpreted as a whole and not on a piecemeal basis,” the judgment reads. “The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA … while courts will permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal … it is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are by their terms otherwise linked.”

The Superior Court justice in Sewell echoed that sentiment, ruling that, “Courts …  should exercise their discretion in favour of protecting employees and must look at the employment agreement as a whole, over its entire expected duration, to determine whether it satisfies the minimum requirements of employment standards legislation.

Referring directly to the Waksdale decision, the judge noted in Sewell, “I find that the “Termination for Just Cause” provision of the contract was illegal insofar as it contracted around the ESA requirement to provide notice except in cases where an employee engaged in ‘willful misconduct.’ Based on the Court of Appeal’s reasoning, I must read the contract as a whole and set it aside if one or more of the terms are illegal, even if the offending term is not at issue in the instant case.”

This was an important victory for my client, as the court awarded him four months of pay and benefits at common law as opposed to the two weeks in lieu of notice he would have received had the clause been applied.

Always comply with the ESA

In its analysis, the Waksdale judgment included these comments about an employer’s obligation to adhere to provincial rules about termination, referring to a 2017 Court of Appeal judgment.

“The ESA is remedial legislation, intended to protect the interests of employees. Courts should thus favour an interpretation of the ESA that ‘encourages employers to comply with the minimum requirements of the Act’ and ‘extends its protections to as many employees as possible’. over an interpretation that does not do so,” court document state.

“Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA. If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship.”

Another interesting aspect in Sewell is that the judge was asked to consider whether my client was entitled to greater compensation because he was promised one thing verbally when he was hired (“the defendant encouraged the plaintiff to accept their employment offer in the hopes that the parties would enjoy a long relationship”), but then asked him to sign a contract that gave him just two weeks’ pay if he were fired without cause.

Be honest when hiring

In her ruling, the judge said my client signed the agreement without fully understanding the termination agreement, trusting it would comply with provincial labour legislation.

“The ‘termination’ clauses … were never explained to him,” the judgment states. “Given the power differential between the parties and the good faith basis upon which they had established their relationship, I accept that it was reasonable for the plaintiff to sign the contract without parsing out the potential meaning of the termination provisions or seeking independent legal advice.”

Employers and their legal counsel across the province should pay special attention to this part of the judgment, as it is very common for firms not to explicitly discuss termination clauses with people they are hiring.

I hope these rulings prompt employers to realize that if they are telling prospective employees they want to hire them, they should also be honest and add, “but we also want to be able to fire you with little compensation.”

Both of these rulings are great news for employees. Plus, I suspect they will keep counsel advising employers busy as they rewrite termination clauses that have now been clearly identified as being unjust and unfair.