This past Summer, the Ontario Court of Appeal released a surprising, and truly revolutionary, decision that potentially invalidates the termination clauses in hundreds of thousands of employment contracts across Ontario.
Going forward, that decision will require tens of thousands of employers, including possibly your own organization, either to immediately revise the termination provisions in their existing employment contracts with all their employees, or face the prospect of having to pay each of those employees dramatically more money when the time eventually comes to terminate them or permanently lay them off.
To the general consternation of many employment lawyers, the Court ruled for the first time that the crucial ‘without cause’ termination provisions of all employment contracts in Ontario are now legally unenforceable if the wording of any other termination provisions, elsewhere in that same contract, contravene any aspect of the Employment Standards Act (“ESA”), or its regulations.
In this particular case, the employee, Mr. Waksdale, had been terminated on a ‘without cause’ basis. Like most terminated employees, he was therefore terminated pursuant to the standard, ‘without cause’, termination provisions in his employment contract, which provided that his employer only had to pay him the minimum statutory entitlements set forth in the ESA. Since Mr. Waksdale had been employed for only 8 months, this meant that his employer was only contractually obliged to pay him 1 week of pay-in-lieu of notice.
The wording of those ‘without cause’ termination provisions, in Mr. Waksdale’s employment contract, had been carefully crafted, by his employer’s lawyers, to ensure that they fully complied with the ESA. Nevertheless, instead of accepting the meagre contractual notice to which he was entitled, pursuant to those expertly drafted provisions, Mr. Waksdale aggressively chose to sue his employer for 6 months’ common law notice.
In court, Mr. Waksdale’s lawyers argued that even though the ‘without cause’ termination provision fully complied with the ESA, it could not be enforced against him because, elsewhere, the employment contract also contained a separate “termination for just cause” clause, whose wording did not similarly comply with the ESA. That separate clause contravened Regulation 288/01 of the ESA Regulations by permitting the employer to terminate Mr. Waksdale without paying him any pay-in-lieu of notice if he committed various types of egregious misconduct – even if it could not be proven that they had not done so intentionally or in a way that was “willful”.
Mr. Waksdale’s lawyers further argued that this inconsistency between the wording of that particular government Regulation and the wording of the “termination for just cause” clause had the effect of fatally tainting all the remaining, and otherwise enforceable, termination provisions elsewhere in the employment contract.
In answer to this argument, the employer’s lawyers argued that those remaining, and otherwise enforceable, termination provisions could not be struck down solely due to the slight inconsistency between the Regulation and the wording of the “termination for just cause” clause. They pointed out that when terminating Mr. Waksdale, the employer had not invoked just cause, and therefore had not relied in any way upon the defectively worded “termination for just cause” clause. They further pointed out, very persuasively, that that “termination for just cause” clause was physically separate from the ‘without cause’ termination provisions pursuant to which Mr. Waksdale had been terminated, and had nothing to do with his termination. For good measure, they also persuasively pointed out that Mr. Waksdale’s employment contract even contained a severability clause expressly stipulating that should any one clause be found to be legally invalid, that would be considered ‘severed’ from the rest of the contract, such as to have no legal impact on the enforceability of any of the other clauses in the contract.
To the surprise of many employment lawyers, the Ontario Court of Appeal dismissed each and every one of the employers’ arguments. The Court accepted Mr. Waksdale’s argument that the inconsistency between the Regulation and the wording of the “termination for just cause” clause fatally tainted, by association, all the remaining, and otherwise perfectly enforceable, termination provisions elsewhere in the employment contract. The Court declared that even though the wording of those remaining provisions fully complied with the ESA, they were nonetheless voided by the separate existence of the ‘termination for just cause’ clause.
To the further surprise of many legal observers, the Court also reiterated that the enforceability of the ‘without cause’ termination provisions could not be saved by severing them from the defectively worded “termination for just cause” clause, pursuant to the severability clause in the contract, on the grounds that no such severability clause can ever be invoked to save any clause that conflicts with the ESA.
For these reasons, the Court concluded that since the expertly drafted ‘without cause’ termination provisions were themselves no longer legally enforceable, Mr. Waksdale was entitled to claim full common law pay-in-lieu of notice, rather than simply to the 1 week of statutory termination pay prescribed in the employment contract.
For employers throughout Ontario, the immediate consequences of this precedent-setting decision are nothing short of cataclysmic. The decision means that the crucial, and expertly drafted, ‘without cause’ termination clause in all their employment contracts with their employees will henceforth be unenforceable if those contracts, elsewhere, also contain a “termination for just cause” clause that implicitly permits employees to be terminated, without pay-in-lieu of notice, in any case of egregious, but unintentional, misconduct.
Many, if not most, employment contract templates that were drafted during the past thirty years contain just such a “termination for just cause” clause, with wording similar to the clause in Mr. Waksdale’s employment contract. Most such clauses permit the employer to terminate employees for just cause, without paying them any pay-in-lieu of notice, whenever those employees engage in some form of relatively egregious misconduct, without distinguishing whether the employee misconduct was, or was not, actually “willful”.
Most such clauses deliberately disregard the stipulation, in Regulation 288/01, that unless the egregious misconduct can be proven to have been actually intentional, or “willful”, the dismissed employee must be paid minimal statutory termination pay. That is because, until the release of the Waksdale decision this past Summer, there was no great downside for employers who chose to quietly disregard this particular, rather inconvenient, aspect of the Regulation. The widely held belief of most employment lawyers was that non-compliance with the Regulation could not invalidate the, other, more crucial, ‘without cause’ provisions of the employment contract.
All of this has suddenly changed. As a direct consequence of the Court of Appeal’s decision, there is now a huge downside for continued non-compliance with this inconvenient aspect of the Regulation, as of several months ago. Going forward, unless and until your organization amends the “termination for just cause” clause in its existing employee contracts, none of the remaining, and more frequently used, ‘without cause’, termination provisions in those contracts will be legally enforceable, thereby forcing your organization to pay full common law notice each time it terminates an employee on a ‘without cause’ basis.
As most HR staff know, paying full common law notice usually means paying the terminated employee one, or several, months of salary per year of service, rather than simply the one or two weeks of salary per year of service that is prescribed by the ESA. The indirect, but immediate, effect of the Waksdale decision is therefore to force employers to potentially have to pay between four and twelve times more money each time they terminate one of their employees.
In the wake of the Waksdale decision, it is therefore of absolutely critical financial importance to your organization that you immediately contact your employment lawyers and get them to review and correct the wording of the termination provisions in your employment contracts with all your employees. Failure to do so will mean that in 2021 and 2022, you will have to pay exponentially more money, than before, each time you terminate, or permanently lay-off, one of your employees.