Rethinking Termination Clauses

August 19, 2020

By Brian Babcock

If you are an employer, it is time again to review and update the termination clauses in your employment contracts.

If you are employee who is terminated, think twice and get legal advice before accepting what your contract provides.

Over the years, the Ontario Court of Appeal has not been friendly toward termination clauses, apparently viewing them as unreasonable attempts imposed by management on employees with limited or no bargaining power – and sometimes, this is correct.

Clauses have been held to be invalid for vagueness, lack of consideration, or other grounds. Recently, many clauses have been held invalid because they offer less than the minimum requirements under the Employment Standards Act (ESA).

Sophisticated employers have responded to each round of cases with new and hopefully improved language. The Court of Appeal continues to find them invalid.

In the latest instalment, Waksdale v. Swegon North America Inc., the contract contained, as many do, separate clauses governing “Termination With Cause” and “Termination Without Cause”. The contract also contained a common “severability” clause which stated if any provision was invalid, the rest of the contract was still valid. The employee was terminated without cause.

The “Termination With Cause” clause was unenforceable as contrary to the ESA. Under the ESA, an employee is entitled to termination pay (plus sometimes severance pay) and benefits unless they are guilty of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”. The common law definition of just cause is considerably broader, plus employers and employees can agree in a written contract to their own definition of “cause”.

 The employer argued that since they were only relying on the “Termination Without Cause” clause, that clause should still be valid, and on its face, it was consistent with the ESA.

The Court of Appeal disagreed, saying that:

An employment agreement must be interpreted as a whole and not on a piecemeal basis. The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA.

The Court also decided that the severability clause did not save the “Termination without Cause” provisions.

As a result, the employee will receive common law damages for wrongful dismissal, which are almost certain to be greater than provided under the written contract.

The first sentence of the above quote also raises undecided questions, such as ‘what if other provisions of the contract breach the ESA (vacation pay for example)?’

Back to the drawing board for employers. Care must be taken to ensure that all provisions of the termination provisions are at least as generous as under the ESA. This includes making sure that the Termination with Cause provisions provide that in the absence of “wilful misconduct” under the ESA, the employee will receive at least their ESA entitlements.

If you are terminating an employee with cause, they may still be entitled to ESA rights, and safe practice is to pay those amounts if in doubt.

If you are an employee, seek advice on your rights before signing a release. If you are presented with a new written contract, consider whether it reduces your rights in law, including on termination. You may have an opportunity to negotiate a fair deal.