Surprise, Surprise, Your Written Employment Contract is Actually Worthless!

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Article2020 | 06 | 30

Surprise, Surprise, Your Written Employment Contract is Actually Worthless!

On June 17, 2020 the Ontario Court of Appeal released its decision in Waksdale v Swegon North America Inc., where (yet again) it set aside an employment contract the parties presumably entered in good faith and intended to be binding. The result was a significant win for the employee and a shocking surprise for the employer. What went wrong?

The case involves a wrongful dismissal claim by an employee seeking damages because the employer failed to provide common law “reasonable notice” for the dismissal. While there was a written employment contract containing a termination clause limiting the employee to statutory entitlements, he argued the contract was actually an attempt to contract out of minimum standards set out in the Ontario Employment Standards Act, and so void.

The employer conceded the termination for cause provision in the contract was void because it violated the ESA with its very expansive definition of the grounds warranting dismissal without notice or compensation. At the same time it argued the termination without cause provision was valid, and because there were no allegations of cause, its obligations were limited by that clause.

On preliminary motion the employer was successful. This was appealed and the Ontario Court of Appeal set aside that decision and ordered the matter be remitted to determine just how much the employee was entitled to receive as reasonable notice.

The Court of Appeal cited earlier case law to support the view that:

1.     Employment standards legislation was remedial in character and intended to protect interests of employees.

2.     Courts should favour any interpretation of employment standards legislation which encouraged employers to comply with the statute and extend the protections of the statute to as many employees as possible

3.     Termination clauses should be interpreted to encourage employers to draft agreements which complied with the legislation. If the only consequence an employer suffered for drafting a termination clause that failed to comply would be an order requiring compliance, then there would be no incentive to draft a lawful termination clause at the start.

4.     The legal enforceability of the termination clause had to be considered as at the time the contract was executed and in the context of the wording alone, not what the employer might choose to do on a termination.

5.     As a result, even if the employer’s actions were consistent with its employment standards obligations, such compliance would not save a termination clause that violated employment standards obligations.

Here, the question was whether the two termination clauses should be considered separately. The Court of Appeal had no hesitation in finding the employment contract had to be interpreted as a whole and not on a piecemeal basis. Read as a whole, and recognizing the power imbalance between employers and employees as well as the remedial protections offered by the legislation, if a contract were in whole or in part illegal it was not enforceable.

It mattered not whether the termination provisions were found in one place in the contract or separated, or whether there was some actual linkage between them. They were part of the same contract, and the invalidity of one voided the other.

The Court of Appeal noted that from a policy perspective, even if an employer did not rely upon an illegal termination clause it still might benefit from its presence in the contract. As an example, where an employee unfamiliar with her statutory rights signed a contract that included unenforceable termination provisions, she might incorrectly believe they were binding and the employer could benefit from that mistaken belief.

Interestingly, in Waksdale there was a severability clause as one typically sees in a contract, which said that:

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.

Despite what can assume where the clear intentions of the parties, the Ontario Court of Appeal refused to allow this clause to save the employment contract. It relied on a 2017 decision of the Ontario Court of Appeal in which a severability clause which would have saved a contract that had otherwise breached the ESA, was found to be invalid altogether. That 2017 decision was premised on the idea that if the severability clause were allowed to rewrite the offending provisions it would incentivize employers to contract out of the ESA but include a severability clause purporting to save the offending provision in the event the employee had the time and money to challenge the contract in court. The severability clause was not void and had application to the rest of the contract potentially, however, it could not have save clauses which were void by statute.

Interestingly, there was a 2016 Ontario Court of Appeal decision (where leave to appeal to the Supreme Court of Canada had been sought and refused) where a severability clause had been upheld and used to correct a possible breach of the ESA by an employment contract. In Waksdale, the Ontario Court of Appeal distinguished that earlier case on the basis that the issue there really was whether or not the termination provisions actually offended the ESA and so the decision should not be viewed as supporting a broad and overarching principle which would allow a severability clause to save a contract which otherwise breached the ESA.

Waksdale is significant for employers and employees throughout Canada due to the determination that once a portion of a termination clause is offside employment standards legislation, every part of the employment contract respecting termination is invalid and a severability clause cannot save the contract.

The result will be that in many cases despite relatively clear wording and intention there will be a significant surprise for the parties and a requirement to provide reasonable notice or pay in lieu in the case of termination of employment without cause.

The immediate and important take away for all employers is that written employment contracts need to be drafted properly, otherwise if they even inadvertently breach employment standards legislation, they may have no value. This is not a “DIY” project for the HR department. Existing contracts should be reviewed and revised by those with the appropriate expertise to ensure they are valid, and new contracts likewise should be drafted by those with that expertise.

For employees, proper advice should be obtained in the context of any dismissal from employment, as the written employment contract may not in fact be as limiting as may have been expected.

*Jeff Palamar is the Leader of the Labour and Employment Practice Group at Taylor McCaffrey LLP, the Manitoba member of the Employment Law Alliance


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Jeff Palamar
Jeff Palamar
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