It’s getting increasingly difficult for employers to enforce termination clauses in written contracts of employment and ancillary documents such as bonus, commission or stock option plans. This isn’t necessarily surprising given the trend in the case law that began some 10 or so years ago, but, at this point, the pendulum has swung far in the direction of the employee.

I’ve always believed that employment contracts are valuable for all concerned. They bring certainty, predictability and clarity to an evolving relationship. At least, that’s the theory.

The courts have identified that there is an inequality in the bargaining power as between the employer and employee such that, in most cases, the employer provides the employee with an employment contract and the employee signs and accepts it. There is no room for negotiation over the terms of the contract. This inequality has informed the development of employment law including “how” courts will interpret employment contracts where, for example, the relationship is terminated and the employer relies on a contractual termination clause to limit its liability.

In most cases over the past decade, the employer has been unsuccessful in arguing that the clause is enforceable. The reasons are many, varied and not entirely consistent or reconcilable. In many cases, the decision appears to have been reached based on the judges “feelings” of what is “fair” in the circumstances, rather than what the parties have agreed to. Of course, these decisions can find support in other principles (e.g. inequality of bargaining power), but that doesn’t make it easy to follow in practice.

I’ve written about this many (I actually can’t count how many) times and said that, in this climate, I can’t and won’t provide a definitive view as to the enforceability of a termination clause in employment documents (even ones I draft). Given the uncertainty and unpredictability in the judicial approach, and the trend, it’s a “coin toss” and I sincerely don’t see how anyone can guarantee enforceability.

I’ve written about the recent Court of Appeal decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391 which, I understand, the employer is seeking leave to appeal to the Supreme Court of Canada. The result in Waksdale appears inconsistent with a lower court decision in Alarashi v. Big Brothers Big Sisters of Toronto, 2019 ONSC 4510 (CanLII) decided by Justice Sossin a year earlier.

In Alarashi the court considered the following contractual language:

Your employment may be terminated for cause and without pay in lieu of notice at any time for serious breaches of the terms of this Agreement and/or BBBST’s policies set out in the Human Resources Manual, and/or for any cause recognized at law…

Justice Sossin said:

Once again, it is important to reiterate that Alarashi was terminated without cause, so this provision did not apply in the context of his termination.

I find no language in this provision which is inconsistent with the ESA.  In other words, given the intent of the parties to comply with the requirements of the ESA, it is appropriate to read this provision as enabling BBBST to terminate an employee only for cause where the “serious breach” of the employment agreement, the human resources manual and/or another law constituted willful misconduct. There is no indication in this language of a limit to rights that contradicts the ESA or of an intent to contract out of the ESA or waive ESA rights on termination.

In my view, this is another setting where a court would need to strain to find ambiguity capable of invalidating the termination clause.

But the Court of Appeal in Waksdale did just that. Even though the employee was not being terminated for just cause, the Court of Appeal concluded that the invalid just cause clause (this was conceded by the parties) invalidated the entire termination clause in the contract. The Court of Appeal found that “it is of no moment that the [employer] ultimately did not rely on the Termination for Cause provision. The court is obliged to determine the enforceability of the termination provisions as at the time the agreement was executed; non-reliance on the illegal provision is irrelevant.”

Another example of the challenging reasoning alluded to by Justice Sossin in Alarashi can be found in Rutledge v. Canaan Construction Inc., 2020 ONSC 4246 (CanLII). In this case, the plaintiff was a construction worker. He had always worked as a construction employee while employed by the defendant. He signed an employment agreement containing the following provision:

The Employee may be terminated at any time without cause upon being given the minimum periods of notice as set out in the Employment Standards Act, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation. The Employee acknowledges that pursuant to the Employment Standards Act they are not entitled to any notice or time in lieu thereof due to the nature of their job and as such they are entitle to absolutely no notice or pay and benefits in lieu thereof upon termination.

The termination provisions set force above, represent all severance pay entitlement, notice of termination or termination in lieu thereof, salary, bonuses, vacation pay and other remuneration and benefits payable or otherwise provided to the Employee in relation to the termination of the Employee regardless of cause or circumstances.

The plaintiff was temporarily laid off on October 10, 2017, he was given a Record of Employment indicating“A – Shortage of work/end of contract or season”. Rutledge was not recalled to work and he found other work in December 2017. He sued the defendant in Small Claims Court alleging damages for wrongful dismissal.
The employer defended, in part, on the contractual termination clause quoted above.

The Small Claims Court judge decided in Rutledge’s favour finding that “the termination clause of the Employment Contract was void because it purported to contract out of the obligation under s. 60(1)(c) of the ESA to pay benefits during the statutory notice period.” As such, the plaintiff was entitled to be provided with reasonable notice of termination at common law which the court found to be 9.5 weeks salary and benefits. Canaan appealed.

On appeal, the Court took a different approach than did the Small Claims Court judge.

The judge agreed that some employees are exempt from termination pay under the Employment Standards Act, 2000. For our purposes, section 2(1) 9 of Regulation 288/01 under the ESA provides that construction employees “are prescribed for the purposes of section 55 of the Act as employees who are not entitled to notice of termination or termination pay under Part XV of the Act.”

Rutledge was a construction employee throughout his employment. The judge observed that:

Rutledge continues to be afforded the protection of all other employment standards set out in the ESA, unless otherwise specifically excluded by other legislation. Accordingly, if any wording of an employment contract purports to deny Rutledge those other employment standards, then those provisions are unenforceable.

The Small Claims Court judge found that, by excluding benefits during the notice period, the termination clause violated the ESA. But that isn’t so as Rutledge, as a construction employee wasn’t entitled to notice under the ESA or benefits continuation during the notice.

Here the Court said, “How can an employer be penalized for confirming in writing that an employee will not receive what he is not entitled to?” So far so good.

But, the Court found the termination clause to be unenforceable because it “potentially violates the ESA at any date after hiring” because it was possible that Rutledge might, someday, no longer be employed as a construction worker and, thus, so the argument goes, would be entitled to notice, benefits continuation and other matters under the ESA that didn’t apply when he held the position of construction employee.

With respect, this reasoning is problematic and strained (to use Justice Sossin’s word). While there are cases that hold that the clause must be enforceable at the time it is entered into and throughout the employment relationship, in this case, it was. Rutledge was hired as a construction employee, worked as a construction employee throughout his time with Canaan and was a construction employee at the time of his termination (i.e. when he wasn’t recalled). The possibility that he might, someday, maybe, be moved into a different position to which the ESA notice provisions applied seems too remote. That didn’t happen, and, presumably, in consideration of that move and all that goes with it, the employer might have required a new contract, which included a proper termination clause.

The Court then noted that the termination clause didn’t deal with severance pay specifically. Canaan was a small employer with a payroll of over $2.5 million thus, for that reason, severance pay was not owing under the ESA. But, so the court said, “if Canaan grew in size, employing more than 50 employees and then discontinued its business, or else had a payroll more than $2.5 million, Rutledge would be entitled to severance pay, irrespective of his job description. The Employment Contract clearly disentitles Rutledge to these employment standards. Again, the potential violation of the ESA renders these provisions unenforceable.”

There are some cases that support this latter view, so I can sort of wrap my head around that position. For example, the Court of Appeal in Covenoho v. Pendylum Ltd., 2017 ONCA 284 (CanLII) says “if a provision’s application potentially violates the ESA at any date after hiring, it is void”.

The appeal was dismissed.

Conclusion

Employers, employees and their counsel are understandably confused by what is now a clear trend in the case law. When will a court set aside a termination clause in an employment contract? That’s not entirely clear (though it should be). What is clearer is that, when reviewing and interpreting such a clause, the starting point seems to be that it’s not enforceable which seems opposite to the way it should be.  Hopefully, the Waksdale leave to appeal to the Supreme Court of Canada will be allowed and clarity will finally come.