There is an ongoing trend of Ontario courts finding termination clauses in employment contracts to be legally unenforceable for increasingly technical (and arguably far-fetched) reasons, making it more difficult than ever for employers to limit their potential liability when ending employment relationships. This trend has continued most recently with the Ontario Superior Court of Justice’s decision in Wilds v. 1959612 Ontario Inc. [Wilds], in which the court found a termination clause to be legally unenforceable for a number of reasons, including the way a “termination for cause” clause was written.
As discussed in greater detail below, Wilds has substantially increased the dismissal-related exposures for countless employers across the province. This is because many “termination for cause” clauses have been drafted in the same way as the one in Wilds since 2020, in response to the Ontario Court of Appeal’s (“ONCA”) landmark decision in Waksdale v. Swegon North America Inc. [Waksdale].
Background
In addition to having statutory termination entitlements under employment standards legislation, Canadian employees are also generally entitled to substantially more at common law, which is called reasonable notice. It varies by jurisdiction, but statutory entitlements are generally capped at several weeks of notice/pay in lieu, whereas an employee can be entitled to up to 24 months of reasonable notice/pay in lieu (or even more in exceptional circumstances).
There are two circumstances where employees are not entitled to reasonable notice: (i) if there is just cause for their dismissal (which is a very high bar); or (ii) there is a legally enforceable termination clause which contracts out of their right to reasonable notice. To be legally enforceable, a termination clause must provide the employee with at least their statutory entitlements under employment standards legislation, and it must not potentially violate such legislation in any way in the future.
In its landmark Waksdale decision, the ONCA effectively invalidated many termination clauses across the province in 2020 when it ruled that: (i) a for-cause termination clause which provides that an employee is not entitled to any notice or pay in lieu of notice if they are dismissed for cause violates the Ontario Employment Standards Act, 2000 (the “ESA”); and (ii) if any termination clause in an employment contract violates the ESA, then it renders all other termination clauses in the contract legally unenforceable. Notably, the ONCA held that these types of for-cause termination clauses violated the ESA because: (i) employees are only disentitled from receiving notice/termination pay under the ESA where they have engaged in “wilful misconduct”; and (ii) this is a higher standard than the common law “just cause” standard for when employees are not entitled to reasonable notice, meaning an employee may still have entitlements under the ESA even if there is cause for their dismissal.
To account for this change in law, many contracts have since included for-cause termination clauses which essentially state “you will not be entitled to notice of pay in lieu of notice if there is cause for your dismissal, unless the ESA requires otherwise”.
It is also important to note that “saving provisions” cannot save a termination clause which otherwise seeks to contract out of the ESA from being legally unenforceable in Ontario, unlike certain other Canadian jurisdictions like British Columbia, where saving provisions are legally effective. Such clauses generally state something to the effect that “if your entitlements under the ESA exceed any provisions in this contract, then those statutory provisions prevail and replace these contractual provisions”.
Wilds v. 1959612 Ontario Inc
Ms. Wilds was employed as an executive assistant for a roofing and exterior building supplies company for approximately 4.5 months, until she was dismissed without cause in October 2020. In response, she filed a claim for wrongful dismissal against her former employer. Although Ms. Wilds had signed an employment contract which contained termination clauses which purported to restrict her entitlement on dismissal without cause to the minimums required by the ESA, plus an additional two weeks of notice/pay in lieu, she argued that these clauses were legally unenforceable for a number of reasons.
Ultimately, the Ontario Superior Court of Justice ruled that Ms. Wilds had been wrongfully dismissed and was entitled to two months of pay in lieu of reasonable notice. This was because the court found the termination clauses in her contract to be legally unenforceable for several reasons. Most notably, one of those reasons was Ms. Wilds’ contract included a for-cause termination clause which stated “[w]e may terminate your employment for just cause at any time without notice, pay in lieu of notice, severance pay, or other liability, other than any notice, pay in lieu of notice or severance required pursuant to the applicable employment standards legislation” [emphasis added]. The clause then went on to define “just cause” as including types of misconduct which would not necessarily amount to “wilful misconduct”, such as “unacceptable performance standards”.
Despite that that this clause was clearly intended to recognize the fact that an employee may still be entitled to statutory termination entitlements under the ESA even where there is cause for their dismissal at common law, the court found that it violated the ESA. In particular, the court ruled that the types of misconduct which were listed as amounting to “cause” in the contract did not amount to “wilful misconduct” under the ESA, and that this could not be rectified by the latter half of the for-cause clause (bolded/underlined above), which the court interpreted to be a saving provision. This was despite that the clause only stated that these types of misconduct amounted to cause (not wilful misconduct), and the clause provided that Ms. Wilds would still be entitled to notice, pay in lieu of notice or severance pay where required by the ESA even if she were dismissed for cause.
Thus, in the result, the court ordered the employer to pay Ms. Wilds thousands of dollars in damages for wrongful dismissal.
The Bottom Line
The Wilds decision illustrates how challenging it is for Ontario employers to enforce termination clauses in the face of the courts finding termination clauses to be legally unenforceable for increasingly technical (and arguably far-fetched) reasons. However, this does not mean that drafting an enforceable termination clause is impossible, despite that the everchanging law in this area creates a moving target for ensuring enforceability.
By observing the trends in the case law, astute employment counsel can predict new technical reasons that Ontario courts will likely use for invalidating termination clauses in the future, enabling us to proactively draft clauses that avoid those problems. For example, our firm predicted Waksdale and ensured that the termination clauses included in our clients’ employment contracts did not run afoul of the wilful misconduct standards, which meant that Waksdale did not invalidate these contracts. In fact, we do not include for-cause termination clauses in our contracts (unless a client expressly requests it, despite our advice), because these clauses are not necessary in the first place, and we predicted that the courts would find further problems with these types of clauses.
Let’s put this another way. We all know by experience, that a “with cause” termination carries with it a very high threshold of proof on the part of the employer. Except in the most obvious of cases, establishing a “with cause” termination before the courts costs employers many tens of thousands of dollars in legal fees not to mention the equally important human resources soft costs associated with defending an employee claim. And in the end, wilful misconduct or wilful neglect of duty still remain a factor in the entitlement to statutory minimums. Why risk it? Why let an increasingly activist judiciary interfere with freedom to contract and the reasonable expectations of the parties when the employment agreement was signed in the first place? Was it not the case that when the employment agreement was signed, there was a clear understanding that if terminated by the employer, the employee would not have access to common law damages and the employer would not have to pay them? Why make it easier for a court to change that understanding?
Our advice: do not include a termination for “just cause” provision in your employment agreements. It is not necessary, it does not protect your company, and it creates yet another avenue for activist courts to give terminated employees much more than they originally bargained for. Do rely upon a well-drafted “without cause” limiting your liability. It is safe, and it is certain.
As this trend continues, employers would be well-advised to ensure the termination clauses in their employment contracts have been reviewed by astute employment counsel who foresee changes in the law and proactively avoid enforceability problems.
If you have any questions regarding the enforceability of your current employment contracts or need assistance with preparing contracts with enforceable termination clauses, please do not hesitate to contact us for expert legal advice and guidance.
