Recent Changes in Law for Employers: Termination Clauses May be Unenforceable

As many of our clients are businessowners who rely on the terms and conditions of their employee contracts to manage their practices/clinics on a daily basis, our team at Kutner Law LLP is constantly monitoring the changes in the law that would impact them. To facilitate this goal, we have a close relationship with Paul Martin of the law firm of Matthew Wilton & Associates who often assists us with our more difficult labour law questions.  Below, please see an article prepared by Paul Martin summarizing the most recent judicial decision, which may render termination clauses in existing employment agreements unenforceable, until amended:

MEMO

To: Ontario Employers

Date: September 24, 2020

RE: Just Cause for Concern: Impact of Waksdale v Swegon North America on Dental Employers

This memo will set out the impact of a recent decision from the Court of Appeal, Waksdale v Swegon North America, 1 which has the potential to render many termination provisions in employment contracts unenforceable.

Employment Contracts and Termination Provisions

In the absence of a provision in an employment contract which limits an employee’s entitlements on termination, employees who are dismissed in Ontario are presumptively entitled to reasonable notice of termination. This notice can be significant, in some cases extending to two years of pay or more.

Contracts limiting this entitlement are, therefore, vital. However, contracts which limit an employee’s entitlements on termination must be drafted carefully. If a termination
provision provides an employee with entitlements on termination less than the Employment Standards Act, 2000 (“ESA”) requires, it is invalid and the employee will be entitled to common law notice.

Many employers use employment contracts which stipulate the circumstances under which an employee can be terminated for “cause”. Such provisions state that if the circumstances mentioned within them are met when an employee is dismissed, the employer has no obligation to provide any termination pay or other entitlements on termination.

A provision that allows for a reduced entitlement on termination for an employee under certain circumstances (such as just cause) must still comply with the ESA requirements on termination pay. If it does not, the provision is void.

In other words, if the contract may result in an employee receiving entitlements less than the minimums required by the ESA, the provision is invalid. Although many Canadians are familiar with the general verbiage of “just cause” for termination, just cause only disentitles an employee from common law reasonable notice (which most employment contracts restrict in any event).

The ESA, however, does not disentitle employees from termination entitlements only because just cause exists. Instead, the ESA uses the higher threshold of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” to determine whether an employee loses the right to these minimum entitlements. Any employee whose actions do not reach this high threshold will still be entitled to termination pay under the ESA. Thus, in order to be compliant with the ESA, a termination provision must ensure the employee receives at least ESA termination pay where the conduct that led to the termination is not intentional, even where it could be considered “just cause” under the common law.


Just Cause and Wilful Misconduct

Many termination provisions provide for different entitlements on termination depending on whether the dismissal is “without cause” or not. While such a structure is not in and of itself problematic, the problem is that the (usually lengthy) lists of the circumstances that allow the employer to dismiss the employee without cause often include circumstances which do not necessarily require that the conduct be wilful. If a just cause provision purports to allow dismissal without compensation in such less-than-wilful circumstances, then it may breach the ESA if it does not also explicitly provide for termination pay where that conduct is not wilful.

For example, in the case of one recent just cause provision that our office reviewed, there were several circumstances which constituted just cause which could occur without any wilful conduct by the employee, but instead by reason of a simple mistake or negligence:

  • a material breach of any term of this Agreement;
  • poor performance, after our having advised you of the standard required;
    impairment or intoxication in the workplace;
  • a finding by your regulatory body of your having committed professional
    misconduct;
  • any and all omissions, commissions or other conduct which would constitute cause
    at law.

Any one of these circumstances could be met without the employee having committed wilful misconduct. However, the provision does not distinguish between when those circumstances are wilful or not in determining the employee’s entitlements on termination. Instead, it disentitles the employee from termination pay without assessing the wilfulness of the conduct. By so doing, it could preclude from termination pay an employee who is entitled to termination pay under the ESA, a breach of that statute which risks invalidating the provision.

It is well-established that, as a result, an attempt to rely on an invalid with cause provision, even where wilful misconduct actually existed, would fail. The Court of Appeal’s decision in Waksdale, however, confirms that the consequences of an over-reaching just cause provision are much more dire than simply invalidating the just cause provision.

Waksdale

In Waksdale, the Court was asked to determine, for the first time, a fairly straightforward question: if a just cause provision violates the Employment Standards Act, 2000, what impact does it have on the rest of the contract. In particular, can other clauses which deal with termination without cause still protect the employer?

The Court of Appeal answered that decision with a resounding “no”. It held that the assessment of whether or not a contract provides employer protection on termination is an all-or-nothing proposition; either every part of the contract that deals with termination is compliant with the ESA, or all such parts are unenforceable. The latter is true even where a part of the contract might, in isolation, otherwise be enforceable.

This meant, in Waksdale, that even though the without cause provision was, on its own, enforceable, the invalid just cause provision struck down all the protections on termination the employer had attempted to put in place, including those that applied to a without cause dismissal.

Impact of the Waksdale Decision

Employment contracts are the single most important strategy employers can use to limit liability to their employees in respect of dismissal claims. In order to provide such protection, these contracts must strictly adhere to the requirements of the ESA. While this has been accepted for decades, employment contracts, particularly older contracts, often included long lists of conduct that could constitute just cause. The theory behind such provisions was that if a type of misconduct were explicit in the contract, it would render an assertion of cause by the employer more defensible. Such provisions were seen as low risk, since the existence of a without cause provision still existed if the just cause provision overreached.

Waksdale turned that question on its head. By treating all termination provisions as one for the purposes of analyzing compliance with the ESA, the Ontario Court of Appeal thereby markedly increased the risk associated with just cause provisions, to where they are only useful in select circumstances, and only then when extremely carefully drafted.

Moreover, the Waksdale decision applies equally to existing contracts as it does to new contracts. This means that employers with employees currently on contracts whose termination provisions are contrary to Waksdale have no protection on termination.

Further, if you are in the process of purchasing a dental practice, you must know the type of contractual liabilities that you could be facing. In particular, you are likely to become responsible for the entirety of an employee’s service. That can lead to significant law liability arising on dismissal absent a valid contract controlling that liability. Controlling that liability is very important, and can only be done through contracts.

The risk posed by the Waksdale can be mitigated through strategies that can be employed both before and after a sale. However, such strategies must be carefully handled and implemented with the assistance of legal counsel to ensure that you receive the protection you need. Leaving these risks unaddressed, or improperly addressing them, could result in a significant accruing liability and significantly impact the value of a purchased practice.

If you have any questions, please contact:

Paul J. Martin
T: 416.860.9989
E: pmartin@wmlitigation.com

Matthew Wilton
T: 416.862.5594
E: mwilton@wmlitigation.com

Frank Portman
T: 416.862.5593
E: fportman@wmlitigation.com

 

1 2020 ONCA 391
* Wilton Martin Litigation Lawyers, a professional corporation

 

Kutner Law LLP is dedicated to ensuring our clients are informed of changes in the law that would impact them or their businesses, especially in these difficult and trying times.