Ontario Employers Need to Update Termination Clauses in their Employment Agreements

As a result of a recent decision of the Ontario Court of Appeal in Waksdale v Swegon, Ontario employers need to update the termination provisions of their Employment Agreements to avoid them being held invalid, thus exposing your organization to much more onerous common law severance obligations.

Executive Summary: We recommend that all Ontario employers using employment agreements with termination clauses work with us to amend those termination clauses to comply with Waksdale for all new hires and potentially for existing employees with termination clauses now rendered invalid by Waksdale.

Background: We have long recommended employers in Canada use termination clauses defining and limiting contractual severance obligations (other than in Quebec where this option is not available). This allowed employers to precisely define their termination obligations and, if desired, reduce that liability substantially. Many of you are doing so. Until Waksdale, the standard drafting of the termination clause in Ontario and other provinces allowed for termination without notice or severance for “just cause” (sometimes short-formed as for “cause”), a common law concept that is defined by case law. The second part of the termination clause defined what notice or severance must be provided when terminating “without cause”. This structure reflected the common law bifurcation between two types of termination: “firing” an employee for “just cause” with no advance notice or severance versus termination “without cause” when notice or severance in lieu is required.

In recent years, the Ontario courts have been invalidating termination “without cause” clauses for potential or hypothetical non-compliance with minimum termination entitlements under the Employment Standards Act, 2000 (“ESA”). In Waksdale, the Ontario Court of Appeal ruled for the first time that because the (elaborately drafted and detailed) definition of just cause in that particular Employment Agreement (“EA”) included grounds that might  not be considered “willful misconduct” or “willful neglect of duties”, the standard under the Ontario ESA, the termination for cause clause was invalid. This was the first such ruling. Even more surprisingly, however, the Court went on to hold that because the “for cause” clause was invalid, the “without cause” clause was also invalid, despite the fact that the EA stated any invalid provision should not affect the rest of the Agreement. The latter ruling was unprecedented and unexpected. Ironically, in Waksdale, the employer terminated without cause and the Court apparently did not find the “without cause” clause invalid on its own terms.

There is a strong consensus among employment lawyers representing employers that Waksdale was wrongly decided. However, the Supreme Court of Canada recently refused to hear an appeal of it, making it the law for the foreseeable future in Ontario. A subsequent decision applied the logic of Waksdale to the more prevalent type of termination clause simply allowing termination without notice “for just cause”, ruling it invalid and thereby invalidating the “without cause” clause in that case.

N.B. So far this decision does not appear to have any implications outside Ontario because other provinces Employment Standard legislation uses the “just cause” standard for defining when an employer can terminate without notice or severance.

The Impact of Waksdale: It is hard to overstate the impact of Waksdale. In effect, the termination provisions of almost all Employment Agreements currently in place in Ontario are likely invalid since most contain a standard termination “for cause” clause. This means employees will instead be awarded highly unpredictable and lengthy common law reasonable notice periods which can run to a month or more per year of service but are set on a case-by-case discretionary basis.

Executives who negotiated favourable termination clauses also run the risk and may find themselves facing employer arguments their severance is reduced to lower common law levels.

What your organization can do to address this:  Concerned employers and counsel are working to try to have the Ontario government address this issue, possibly by amending the ESA to incorporate the “just cause” standard. However, such amendments are hard to get and take time.

In the meantime, we recommend all Ontario employers using employment agreements contact us to:

1. At a minimum, to have us amend the termination provisions of their Ontario template Employment Agreements for use with new hires or employees being promoted to address Waksdale; and
2. discuss whether existing employees covered by Employment Agreements should be asked to sign amending agreements to address Waksdale.

The latter step is more complex for a variety of reasons, including that:

1. it may draw employee attention to the weakness in current termination clauses;
2. some employees may refuse to sign; and
3. employees need to receive new “consideration” (i.e. some kind of new benefit) in return for signing such an amendment,

so requires more careful consideration.

We would be happy to discuss how to best address this development.

You can contact us at:

Geoffrey Howard, ghoward@howardlaw.ca 604 424-9686

Sebastian Chern, schern@howardlaw.ca 604 424-9688