The Ontario Superior Court recently issued a decision in Sewell v. Provincial Fruit Co. Limited, 2020 ONSC 4406 (Sewell), applying the reasoning set forth in the Ontario Court of Appeal (OCA) decision, Waksdale v. Swegon North America Inc., 2020 ONCA 391 (Waksdale).  In June 2020, Waksdale established the proper method for determining whether a termination clause in an employment agreement is enforceable. 

Background

Sewell arose as a summary judgment motion brought by an employee to determine, among other things, damages for wrongful dismissal at common law after six months of employment in a senior sales role.  In his motion, the employee sought damages representing:

• Eight months’ pay in lieu of reasonable notice, less:
  
  • the amounts already paid to him; and
  • his earnings during this notice period;
• The bonus he would have received during the reasonable notice period; and
• The loss of benefits during the reasonable notice period.

The employee was not induced to this position,¹ which entitled him to annual compensation of $126,200 and a discretionary bonus.  Upon the termination of the employee’s employment, the employer paid him two weeks’ salary and benefits, which was consistent with his employment contract and the requirements of the Employment Standards Act, 2000 (ESA). 

The employee’s employment contract included the following termination clause:

b) Termination by the Company for Just Cause

The Company is entitled to terminate your employment at any time and without any notice or any further compensation for just cause and the Company will not have any further obligations to you whether at contract, under statute, at common law or otherwise.

c) Termination by the Company without Just Cause

(A) The Company will be entitled to terminate your employment at any time without just cause by providing you with the following:

…

(ii) a payment, or at the Company’s sole option, notice or combination of notice and pay in lieu of such notice representing termination pay and, if applicable, severance pay, as may be required under the Employment Standards Act, 2000, as amended from time to time (the “Separation Period”);

…

It is agreed that upon compliance with the above provisions, the Company will be release [sic] from any and all obligations to you, whether statutory, under contract, at common law or otherwise.

Four months after his employment termination, the employee mitigated his damages by accepting new employment with an annual salary of $92,000. 

Court’s Decision

The court accepted that the employee did not understand the full implications of the termination clauses, which were not explained to him.  Further, it concluded that given the power imbalance between the parties and the fact that they established their relationship on a good-faith basis, it was reasonable that the employee signed his employment contract without analyzing the termination provisions or seeking independent legal advice. 

Relying on three Ontario Court of Appeal decisions that were decided between 2017 and 2020, one of which was Waksdale, the court decided that the employment contract was void.  It awarded the employee four months’ common law reasonable notice, less (a) the amounts already paid to him; and (b) his earnings during this notice period.  The court also awarded the employee applicable benefits.

In discussing its reliance on the Court of Appeal decisions, the court stated:

These cases make it clear 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.  (para. 15)

The court concluded that the contract violated the ESA for the following reasons:

1. It combined notice and severance pay entitlements in violation of the ESA requirement to pay both notice and severance; and

2. The contract’s “Termination for Just Cause” provision was illegal because 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 in Waksdale, the contract must be read as a whole and set aside if one or more of its terms is illegal, even if the offending term is not at issue.

Bottom Line for Employers

Sewell puts employers on notice that the Ontario Superior Court has begun to apply the reasoning in Waksdale when faced with determining whether a termination clause is enforceable. In applying Waksdale, the court in Sewell reiterated that courts should:

• Exercise their discretion to protect employees;  

• Interpret an employment agreement “as a whole, over its entire expected duration” when determining whether it satisfies the minimum requirements of employment standards legislation;

• Consider whether a “just cause” termination provision is unenforceable if it contracts out of the ESA requirement to provide notice except in cases where an employee is disentitled to such notice or pay in lieu pursuant to the ESA arising from their conduct; and

• Consider whether an employment agreement is void and the employee is entitled to common law reasonable notice if any termination provision in the agreement violates the ESA.   

We understand that leave to appeal to the Supreme Court of Canada has been sought in the Waksdale decision, which could further change the law in this respect.  We will update our readers as soon as further developments occur.

In any event, employers are strongly encouraged to take appropriate steps to ensure that all termination provisions in their employment agreements comply with ESA requirements, including “Just Cause”/“For Cause” provisions.  To increase the likelihood that termination provisions will be viewed as being in compliance with minimum ESA requirements, employers should:

• Explicitly refer in them to all minimum ESA entitlements;

• Avoid combining notice and severance pay entitlements in violation of the ESA requirement to satisfy both; and

• State that if a termination clause falls below ESA requirements, it should be interpreted as complying with them.

Termination clause compliance is an area of law that is constantly evolving and is the subject of significant litigation.  Employers should seek the advice of experienced employment counsel to draft new employment contracts, and to review existing employment contracts to ensure their compliance.  Such employment contracts should be updated on a regular basis as a result of the ever-changing state of the law.