Waksdale: Wholesome Review of Employment Agreements

On June 17, 2020, the Ontario Court of Appeal released a decision, Waksdale v Swegon North America Inc., 2020 ONCA 391, which has increased the chances of Courts finding the termination clauses in many existing employment contracts to be unenforceable.

Facts and the Lower Court Decision (2019 ONSC 5705)

Benjamin Waksdale had worked for Swegon North America Inc. for six months as its Director of Sales. After those six months, he was terminated without cause and was provided with one week of severance pay in addition to the employment standards minimums required by the Ontario Employment Standards Act (“ESA”).

Mr. Waksdale had signed an employment agreement containing two separate termination provisions: one which would allow him to be terminated for cause without being provided with any notice, and one which purported to limit the amount of notice to which he would be entitled if he was terminated without cause.

Mr. Waksdale commenced a suit for wrongful dismissal, seeking six months pay in lieu of reasonable notice.

Mr. Waksdale’s employment agreement contained the following without-cause termination provision:

Termination of Employment with Notice
You agree that in the event that your employment is terminated without cause, you shall receive one week notice or pay in lieu of such notice in addition to the minimum notice or pay in lieu of such notice and statutory severance pay as may be required under the Employment Standards Act 2000 as amended. All reimbursement for business expenses shall cease as of the date of termination of your employment, however, you shall be reimbursed for legitimate business expenses that have been incurred and submitted to the Company but not as yet paid you to that date. The terms of this section shall continue to apply notwithstanding any changes hereafter to the terms of your employment, including, but not limited to, your job title, duties and responsibilities, reporting structure, responsibilities, compensation or benefits.

Both parties agreed that this provision was in accordance with the terms of the ESA, and was therefore enforceable. However, counsel for Mr. Waksdale argued that as the wording of the for-cause termination provision contained in the employment agreement was contrary to the terms of the ESA, and was therefore unenforceable, the entire employment agreement, or at least the without-cause termination provision, was similarly unenforceable.

The employment agreement also contained the following severability clause:

You agree that if any covenant, term, condition or provision of this letter outlining the offer of employment with the Company is found to be invalid, illegal or incapable of being enforced by a rule of law or public policy, all remaining covenants, terms conditions and provisions shall be considered severable and shall remain in full force and effect.

The motion judge found that, as Swegon had not alleged just cause at the time of termination, the invalidity of the for-cause termination provision had no bearing on the validity of the without-cause termination provision. In effect, the validity and effect of each clause was considered in isolation. The plaintiff’s action was dismissed.

The Court of Appeal’s Decision (2020 ONCA 391)

The Court of Appeal disagreed with the motion judge and allowed the appeal.

The Court of Appeal found that, as the for-cause termination provision contravened the terms of the ESA, the termination without cause provision was also void and unenforceable. In so finding, the Court of Appeal stated at para 10:

“An employment agreement must be interpreted as a whole and not on a piecemeal basis. 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. In conducting this analysis, 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. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach without regard to their combined effect”.

The Court of Appeal also noted that, when analyzing the enforceability of employment agreements, the focus must be on the “wording of the contract alone”, and not what the employer “might have done on termination.”

Furthermore, the severability clause was of no assistance, as the Court followed earlier Court of Appeal authority which held that a “severability clause cannot have any effect on clauses of a contract that have been made void by statute.”

Outcome and Implications

The significance of Waksdale in Ontario is drawn from the distinction between a for-cause termination as that term is understood in the common law, and the requirement in the ESA (O Reg 288/01) that only an employee “who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by an employer” is not entitled to notice of termination or termination pay. If a for-cause termination provision allowed an employee to be terminated for some conduct which fell below the level of “wilful misconduct”, as that term has been interpreted by the Courts in Ontario, that clause would be unenforceable. And, as we can see in Waksdale, if that occurs, the remainder of the employment agreement may be similarly unenforceable.

Comparably, the significance of Waksdale in Alberta has yet to be determined. The Alberta Employment Standards Code (“ESC”) provides that termination notice is not required if “the employee is terminated for just cause”. That term is not defined, and has been interpreted to be identical to the common law meaning of just cause.

However, where Waksdale introduces uncertainty is the direction from the Court of Appeal to interpret employment agreements “as a whole and not on a piecemeal basis.” Prior to this case, the focus in most cases would usually be on the enforceability of any termination-without-cause provisions in the employment agreement purporting to limit the employee’s common law reasonable notice entitlements. However, now employees may seek to leverage the reasoning of the Court in Waksdale to argue that any clause of their employment agreements which could potentially run afoul of the requirements of the ESC should invalidate the entire employment agreement, including invalidating any termination without-cause provisions. The implications of such reasoning could drastically increase employer’s severance obligations.

Take-Away

The take-away from Waksdale is that Employers should ensure that all provisions of their Employment Agreements are in line with or exceed the minimum requirements of the ESC and other applicable legislation. If in doubt, the employment agreements should be reviewed by an experienced employment lawyer.

If you have an employment law question, reach out to a member of our Labour & Employment Team