Soloway Wright LLP is often contacted by employers who have concerns about the enforceability of their employment contracts. Recent developments in the law have rendered many employment contracts unenforceable, which can be costly to employers upon termination. The takeaway from the recent developments is that, when drafting an employment contract, the entire contract should be carefully drafted to ensure compliance with the Employment Standards Act (ESA), not just the termination provisions.
The Cost to Employers: ESA vs. Common Law Notice
Employment contracts that contain termination provisions that are non-compliant with the ESA will cost employers more money when they terminate an employee, particularly when an employee has been with the company for a long period of time. The ESA entitles employees to a minimum notice period of 1 week of wages and benefits for every year of service, to a maximum of 8 weeks, as well as severance pay if the qualifying criteria are met. When the employment agreement contains termination provisions with language that the Courts have interpreted as unenforceable, the employee is entitled to a common law notice period instead of a statutory notice period. The difference is that a statutory notice period is calculated using the entitlements in the ESA, while the common law notice period is imposed by the Court. The Court will calculate the common law notice period using various factors, including the employee’s age, the length of their service, the character of their employment, and the availability of similar employment. The “high water mark” of common law notice is generally said to be 24 months of wages, although some Courts have awarded more. This is a substantial increase from the minimum entitlements under the ESA.
Commonly Used ‘Cause’ Termination Provisions are Invalid
For years, reference to the employer’s right to terminate for “cause” was the standard language used by lawyers when drafting the provision that would apply to the termination of an employee who has done something to warrant termination. Simply, if there is “cause” the employee will not receive notice or benefit continuation upon termination. However, recent developments in the law have made it clear that the reference to a “cause” termination will invalidate the termination sections in an employment contract. Courts have interpreted “cause” as the common law standard of cause, a standard which is non-compliant with the ESA.
The ESA says that an employee can be terminated without notice if the employee is: “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”. To meet the ‘wilful misconduct’ standard in the ESA, the employee’s misconduct leading to termination must be intentional. In contrast, the common law standard of “cause” or “just cause” has been made out where the employee’s conduct was not intentional, an example being prolonged incompetence.
Severability or “Saving Provisions” Will Not Save a Non-Compliant Employment Agreement
Many employment contracts contain language that states that a termination provision will comply with the ESA. The purpose of this language is to attempt to ‘save’ an otherwise unenforceable termination provision from invalidating the employment contract. However, the decision of the Court of Appeal for Ontario in Waksdale v. Swegon North America Inc. 2020 ONCA 391 states that termination provisions in an employment contract must be read as a whole. Thus, if the termination provision governing “for cause” termination is invalid for inconsistency with the ESA, the “without cause” termination provision will also be invalid, and vice versa. This is significant because many employers will set out an employee’s entitlements by contract if they decide to end the relationship for pure business reasons. Additional information on the implications of the Waksdale decision can be found in Soloway Wright’s article on the decision found here.
Any Clause Mentioning Termination Can Invalidate the Employment Agreement
The decision of the Court in Henderson v. Slavkin et al 2022 ONSC 2964 took the decision in Waksdale one step further. The Court in Henderson found that any clause in an employment agreement that mentions termination runs the risk of invalidating the entire agreement.
The employment agreement in Henderson contained a conflict-of-interest clause and a confidentiality clause, and both clauses stated that a failure to comply with the clause is grounds for termination without notice. The Court invalidated the employment agreement because the wording of the ‘misconduct’ in both clauses did not rise to the level of wilful or intentional misconduct required by the ESA.
The Court ruled that the conflict-of-interest clause was non-compliant with the ESA as it was overly broad and ambiguous. The confidentiality clause was non-compliant with the ESA as it did not make it clear that the misconduct related to confidentiality must be wilful and not trivial. It is possible that there could be a situation where confidentiality could be disclosed accidentally, so the Court concluded that the wording of the confidentiality clause was non-compliant with the standard of a “wilful” intention required by the ESA to terminate an employee without notice.
Even though the termination clause in Henderson was compliant with the ESA, the reference to termination in the confidentiality and conflict of interest clauses caused the entire employment agreement to be invalid. Ultimately, the employment contract in Henderson was unenforceable so the employee was awarded common law notice in the amount of 15 months.
The decision in Henderson was specific to the confidentiality and conflict of interest clauses, however, the decision could be used by the Courts to invalidate an employment agreement due to any provision that mentions termination for conduct that does not rise to the standard of wilful misconduct.
Employers who have not recently updated their employment contracts should consult a lawyer to determine the enforceability of the language in their employment agreements and consider changes in those agreements for new hires. For existing employees, it may be more difficult to impose changes that will be enforceable, so legal advice is recommended.
About the Author: Shannon is an associate lawyer at Soloway Wright LLP practicing general litigation with a focus on Labour & Employment Law and Commercial Litigation. Shannon has experience with the proper drafting of employment contracts and employment disputes including the interpretation of employment contracts.
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DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. The information contained herein summarizes only certain aspects of the subject matter and is not a comprehensive review of applicable law. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.
