Ontario Court of Appeal 2020: Illegal Provisions Invalidate Contractual Severance Pay Limitations

With the COVID-19 pandemic employees and employers often go back to the employment agreements to review their rights and obligations in case of termination. Beware! What you read in the contract might not be the full story. Recently, the Ontario Court of Appeal rendered a very important decision that clarifies that if any part of the termination clause breaches the Ontario Employments Standards Act,  all contractual limitations on severance pay are invalidated and employees may claim the more generous common law notice pay upon termination. This decision is an important reminder that Courts will not allow employers to intimidate employees with illegal contractual provisions.

In Waksdale v Swegon North America, 2020 ONCA 391, the Ontario Court of Appeal found that if any part of a termination clause violates the ESA the entire clause will fail and the employee is not limited to contractual severance pay. The Court decided that:

  • termination for cause and termination without cause provisions must be read together and that if one of those provisions is contrary to the ESA, then all contractual termination provisions are invalid. This is regardless whether the employee was terminated for or without cause;
  • whether the employer relied or not on the illegal provision is irrelevant;
  • a severability clause that provides that if one provision of the agreement is unenforceable the rest of the agreement would remain in full force and effect would not save the breaching termination clause.

The specific facts in Waksdale dealt with an employee who had been terminated without cause and had a lawful termination clause related to without cause termination. However, the employment contract had an unlawful termination with cause section. The Court of Appeal held the unlawful with cause termination section invalidated all contractual limitations on severance pay and the employee was entitled to claim the higher common-law notice severance pay.

Leave for appeal of the Waksdale decision was dismissed by the Supreme Court of Canada on January 14, 2021.

With Cause Termination Under the ESA Requires Intention

Under the ESA Regulations, an employee may be terminated for cause and thus owed nothing by the employer if they have been “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” By contrast under the judge-made common law, an employee may be terminated for cause if they were reckless in neglecting their duties and thus repudiated the employment contract. Practically, as confirmed by the Ontario Superior Court in Oosterbosch v FAG Aerospace Inc., an employee may be entitled to ESA severance pay even when they are terminated to common law just cause.

Often employment contracts will provide that the employer may terminate the employee for cause for reasons other than those specifically provided by the ESA Regulation above. In those circumstances, the contractual termination clauses may be invalid in their entirety regardless of whether the employee was terminated for or without cause.

Employees Should Seek Advice Before Signing Off 

The Ontario Court of Appeal clearly explained that even when an employer does not rely on the illegal provision, it may still benefit from the illegal clause:

“For example, an employee who is not familiar with their rights under the ESA, and who signs a contract that includes unenforceable termination for cause provisions, may incorrectly believe they must behave in accordance with these unenforceable provisions in order to avoid termination for cause. If an employee strives to comply with these overreaching provisions, then his or her employer may benefit from these illegal provisions even if the employee is eventually terminated without cause on terms otherwise compliant with the ESA.”

The key takeaway for employees from this new Court of Appeal case is two-fold:

  1. Seek legal advice before signing off on a severance package because the contractual limitations might be invalid;
  2. Before signing an updated employment contract with your employer, ask a lawyer to review both your old and new employment contract to ensure that you do not mistakenly agree to reduce your termination entitlements.

Monkhouse Law is an employment law firm that specializes in wrongful terminations and has a proven track record of fighting termination clauses.

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