Increased Judicial Scrutiny in ON with Respect to Termination Clauses

Over the past year, Ontario Courts are increasingly finding ways to strike down termination clauses in employment agreements that have been negotiated by the parties. This line of case law in Ontario suggests that Courts will exercise their discretion to favour employees’ rights when determining the enforceability of termination provisions.

Just Cause Termination Clause Rendered Entire Termination Provision Unenforceable

This trend began approximately one year ago with the Ontario Court of Appeal’s decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391 (Supreme Court Denies Leave to Appeal). In this decision, the employer had drafted an employment agreement that contained a without cause termination provision that complied with the statutory requirements under the Employment Standards Act (Ontario), and provided the employee with pay in lieu of notice in accordance with that provision. However, the employment agreement also contained a just cause termination provision that failed to meet the legislative requirements. The Court held that the offending just cause termination clause rendered the entire termination provision unenforceable, including the termination without cause provision. The Court also held that the severability clause did not save the without cause portion of the termination provision given that the two provisions were intended to be read together. As a result, the without cause provision in the agreement was unenforceable and the employer owed common law reasonable notice.

Following this case, subsequent Ontario decisions have similarly held that termination provisions in employment agreements are unenforceable since they do not comply with the statutory requirements under the Employment Standards Act (Ontario). In Ojo v. Crystal Claire Cosmetics Inc., 2021 ONSC 1428, relying on the decision in Waksdale, the Ontario Superior Court found the termination clause in an employment agreement was unenforceable for two reasons. First, the termination provision did not comply with the just cause provision of the Employment Standards Act (Ontario). Further, the termination provision was silent on the employer’s obligation to continue paying benefits the employee was entitled to in accordance with a unique statutory requirement in the Employment Standards Act of Ontario.

Termination Provision Unenforceable for Federally Regulated Employer

This trend in Ontario is not limited to provincially regulated employers. In Sager v. TFI International Inc., 2020 ONSC 6608, a decision involving a federally regulated transportation company, the Ontario Superior Court found the termination provision in an employment agreement was unenforceable because it attempted to contract out of the employer’s statutory obligations under the Canada Labour Code. In this decision, the employment agreement provided three months’ base salary or one month base salary per year of service to a maximum of 12 months in the event of a without cause termination. This amount well exceeded the statutory minimum with respect to notice of termination or payment in lieu of notice under the Canada Labour Code;  however, the termination provision further stated that the “payment shall be inclusive of any and all requirements” owing under the Canada Labour Code.

By paying a lump sum payment comprised of only the employee’s base salary (excluding pension, car allowance and bonus) the entire termination provision was rendered void due to the fact that it violated section s. 231(a) of the Canada Labour Code, which states that an employer shall not reduce the rate of wages or alter any other term of condition of employment once notice of termination has been provided except with the employee’s consent. Given that the termination provision was found to be unenforceable, the employee was awarded common law reasonable notice of nine months.

Considerations for Employers in other Provinces

While the statutory requirements with respect to termination are different under the Employment Standards Code in Alberta, B.C. Saskatchewan and Manitoba, all employers should be aware of this heightened level of judicial scrutiny with respect to the enforceability of termination provisions contained in employment agreements in Ontario, in case we see the same trend arise in other jurisdictions. To ensure that termination provisions will be enforceable, employers should review their employment agreements in their entirety to confirm they are compliant with all statutory requirements under applicable provincial or federal legislation. Employers must also take care to ensure that termination provisions clearly and unambiguously oust the employee’s entitlement to common law reasonable notice; otherwise, they risk potential exposure to substantial liability.

With the lifting of COVID-19 restrictions in various provinces, and an anticipated increase in the work force, employers should seek legal advice when reviewing their employment agreements to ensure compliance with the relevant legislation. A member of our labour and employment team would be pleased to assist you.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.