Illegal termination provision may affect employment contract’s other enforceable provisions: ONCA

Employment agreements should be read as a whole and not on a piecemeal basis, the Court of Appeal for Ontario said in a June 17 ruling.

In Waksdale v. Swegon North America Inc., 2020 ONCA 391, the appellant, hired as a director of sales by the respondent, was terminated without cause and received two weeks’ pay in lieu of notice. The appellant filed an action for wrongful dismissal and a motion for summary judgment, seeking damages for the alleged dismissal without reasonable notice.

The appellant conceded that the employment contract’s “termination of employment without notice” provision met the minimum requirements of the Employment Standards Act, 2000, S.O. 2000, c. 41, but contended that the “termination for cause” provision tried to contract out of the minimum standards of the ESA and was therefore void and unenforceable.

The respondent acknowledged that the “termination for cause” provision was void because it breached the ESA, but argued that it could rely on the “termination of employment without notice” provision because it was not alleging that the appellant had been terminated for cause.

Justice Edward M. Morgan of the Superior Court of Justice of Ontario found the “termination of employment without notice” provision enforceable and able to stand alone and therefore dismissed the appellant’s action and motion.

The Ontario Court of Appeal set aside the order and remitted the matter for a determination of the quantum of the appellant’s damages. Justice Sarah E. Pepall, Justice C. William Hourigan and Justice Lois B. Roberts, writing for the appeal court, said that the illegality of the “termination for cause” provision affected the enforceability of the “termination of employment without notice” provision.

Justice Morgan erred by interpreting the provisions using a piecemeal approach, the court found. “The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA,” the panel wrote.

Termination provisions that are wholly or partly illegal are not enforceable, and “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,” said the court.

This is intended to take into account the power imbalance between the employer and the employee and the remedial nature of the ESA, which seeks to safeguard the employee’s interests.

Even if an employer does not ultimately rely on an illegal termination provision, as was the case here, there is still the possibility that an employer may benefit from an illegal clause not relied upon, said the court. For example, an employee who does not understand the protections afforded by the ESA may sign a contract that includes unenforceable provisions and may feel compelled to adhere to these provisions to avoid being terminated, unaware that these provisions are unenforceable.

The respondent also tried to rely on a severability clause, which asked its employees to agree that provisions in the employment contract declared to be illegal or unenforceable would be considered severable from all other remaining provisions.

The court rejected this submission, stating, “Having concluded that the Termination for Cause provision and the Termination of Employment with Notice provision are to be understood together, the severability clause cannot apply to sever the offending portion of the termination provisions.”