On top of daily changes by the Ontario government to employment law in Ontario during the COVID-19 emergency, the Ontario Court of Appeal has added one more uncertainty employers need to manage. The Court’s June 17, 2020 decision, Waksdale v. Swegon North America Inc., made a significant change to the interpretation of termination clauses in Ontario. Specifically, it potentially voided the termination clauses in thousands of contracts of employment across Ontario. This introduces uncertainty of exposure when employers have to consider the appropriate notice period when dismissing an employee (such as during an economic downturn caused by a global pandemic). Fortunately, for the majority of organizations, this is not as dramatic as it sounds.
The relevant facts in Waksdale are straightforward. Waksdale was dismissed “without cause” from his employment. He sued his employer for wrongful dismissal alleging entitlement to “reasonable notice” upon dismissal, rather than the contractual notice spelled out in his contract. His contract of employment contained two clauses relating to termination. The first clause outlined his employer’s obligations when dismissing him “for cause”. The second addressed dismissals “without cause”. Like many contracts of employment, the employer wanted to eliminate the uncertainty of “reasonable notice” by providing specific delineated entitlements upon dismissal. The “without cause” clause was separate from the “for cause” clause. At a summary judgment motion, his employer conceded that the “for cause” clause was contrary to the Employment Standards Act 2000, but argued its invalidity did not influence the “without cause” clause’s validity. The judge agreed with the employer. The clauses were distinct from each other and therefore the “without cause” clause survived and limited his entitlements to the contractual notice requirements. Waksdale appealed.
In a surprisingly short decision, the Court reversed the motion judge’s decision. They found that where a termination clause dealing with “for cause” termination was found void because it was contrary to the ESA 2000, the “without cause” provision will also be void. It does not matter if the clause was compliant with the ESA 2000. It could also not be saved by a severability clause.
Why is this is a significant change?
Previously, many contracts of employment included “for cause” provisions that were contrary to the ESA because they provided no notice upon termination. The ESA 2000 only relieves an employer of paying the minimum statutory entitlements in specific situations outlined in O.Reg 228/01. The most common grounds were “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” While there is a significant overlap between “just cause” at common law and the misconduct standard in the ESA, this will not always be the case. Accordingly, most of these types of “no notice” clauses are void.
Historically, this was not a significant issue. Employers rarely terminate an employee for cause, so the validity of a separate “cause” clause had no impact on entitlements in a “without cause” dismissal. The Court of Appeal’s decision changes this. If an employer seeks to rely on the contractual notice requirements, it will have to satisfy a Court that all clauses relating to termination are valid. If they cannot meet this requirement, employers may be obligated to pay out an uncertain amount of common law reasonable notice rather than the clear notice entitlements the parties initially contracted for. This may be a tall order for organizations that have not recently updated their contracts of employment.
But you said don’t panic?!
Employment lawyers on both sides of the fence have been weighing in on this decision. Employer side counsel are reaching out to their clients with advice on how to manage this sudden removal of contractual certainty. Employee side counsel are advising people to seek legal advice if their employer suddenly places a new contract of employment in front of them because the employer may be trying to take away significant rights. Nothing drives a wedge into the employment relationship better than a panic.
Although the mass invalidity of an organization’s termination clauses may sound dramatic, this decision does not mean the sky is falling. The payment of reasonable notice is only required upon dismissal. Until an organization has to make that choice, this is an unrealized risk. Risks can be managed with appropriate planning.
What’s the plan?
Proper risk management is inherently individualized. It starts with recognizing what your exposure is. Organizations should take stock of their current standard contract of employment. If they do not have one, they should get one. If the contract is problematic, an amendment is in order. This should prevent this issue from arising with any new hires going forward.
For existing employee contracts, there are a number of ways a change can be implemented without risking a healthy employment relationship. Promotions, raises, and other benefit increases introduced over the course of the employment relationship are an excellent time to have the parties revisit these contractual terms. Even for employees who may not be already scheduled for a change in their employment, providing notice of these changes may also be a viable option depending on the circumstances.
Unfortunately, for many organizations the COVID-19 pandemic means gradual phasing in of new contracts may not be possible. A significant number of organizations have been, and will continue to be, forced to reduce their workforces. Even in these cases, employers should not panic. With the economic uncertainty of COVID-19, the changes to the CERB, the CEWS, and O.Reg 228/20, decision makers can feel pressured to take immediate action to address yet another employment challenge. Waksdale also represents an opportunity for organizations to develop thoughtful and practical solutions to this issue moving forward. Implementing these changes in an open and responsive manner will be the best tool to reduce the exposure to litigation or administrative complaints.
As the progeny of Canadian diplomats, Devan grew up in five different countries before returning to Canada. It was somewhere between Frankfurt and Vienna where Devan first learned to ride a bicycle. He is now a cycling fanatic: Devan is also the firm’s resident employment law fanatic. Got an employment practices liability policy question? Devan has your answers.