Jun 17, 2020  By John Hyde

Ontario court strikes down most employment contracts

June 17, 2020- If employers (particularly small and medium-size businesses), were not already suffering enough facing the present Covid-19 business realities, the Ontario Court of Appeal has just landed yet another blow to companies struggling to stay afloat.

In a unanimous decision, the Court in Waksdale vs. Swegon North America Inc., has effectively ruled that the majority of employment contracts are unenforceable.

Why? Simply stated, the Court attacked employment agreements which include a clause that states, the employee can be terminated without notice [or pay in lieu] for just cause. More specifically, the Court found that where such clause is included in an employment agreement, even if it is not relied upon by the employer for the purposes of the termination, it is contrary to the Employment Standards Act of Ontario (ESA) and, is therefore unenforceable. Again, it does not matter whether the termination of the employee is without just cause. It does not matter if a “without just cause” provision in the employment agreement would otherwise appear to be enforceable. It also matters not, if the employment agreement has a severability clause; it does not cleanse the waters of an already poisoned well.

In confirming prior decisions, the Court noted in part:

  • the ESA is remedial legislation, intended to protect the interests of employees. Courts should favour an interpretation of the ESA that encourages employers to comply with the minimum requirements of the Act. A termination provision which does not meet the minimum standards of the ESA, will be held to be unenforceable.
  • The enforceability of a termination provision in an employment contract must be determined at the time the agreement was executed. The wording of the contract alone should be considered in deciding whether it contravenes the ESA, not what the employer might have done at termination.- Therefore, even if the employer’s actions complied with the ESA obligations at termination, this does not save a termination provision that violates the ESA.
  • The existence of an unenforceable clause within an employment agreement (that is, where such clause does not meet the minimum standard of the ESA), effectively poisons the entire well, rendering the full agreement null and void.
  • Even if there exists an unenforceable just cause provision and an otherwise enforceable without cause provision, the employer’s reliance upon the latter in terminating an employee without just cause does not protect the employer. As the court noted, an employment agreement must be interpreted as a whole, and not on a piecemeal basis. The court is obliged to determine the enforceability of the termination provisions at the time the agreement was executed; non-reliance on an illegal provision is irrelevant.
  • A severability clause, allowing for the effective removal of an unenforceable part of the employment contract, cannot save the entire employment agreement from being held to be unenforceable. As the court noted, “a severability clause cannot have any effect on clauses of a contract that have been made void by statute”.
  • Where a contract has been found to be unenforceable by virtue of any clause not meeting the minimum standards of the ESA, the employee is entitled to common law notice of termination or, pay in lieu.

For well over 20 years, employers have been including similar just cause language in employment contracts. Those contracts are no longer enforceable.

Remember, the ESA grants among other things, minimum standards of notice, pay in lieu of notice and/or severance pay, in the event the employee has not engaged in wilful misconduct, disobedience or, wilful neglect of duty that is not trivial. Because the concept of just cause is so broadly construed, that means a lesser of offence (i.e., not wilful) would still entitle the employee to minimum notice and severance pay (where applicable). Therefore, by stating that the employee may be terminated without notice or pay in lieu of notice for just cause, this is contrary to the ESA and, is therefore unenforceable.

What does this mean for employers? We strongly advise employers to revisit their employment contracts immediately. “Just cause” and “without cause” termination provisions must meet or exceed the ESA. When in doubt, seek the assistance of competent employment law counsel. It is quite likely that many employees will require new contracts or at the very least, amendments to the original. Remember: new contracts or amendments are only enforceable if the existing employees are provided with fresh consideration; that “something extra” to make the agreement legally binding. Fresh consideration can be a pay raise, a one-time monetary payment, greater benefits or a change in position. Continued employment is not sufficient to be treated as fresh consideration. Without fresh consideration, a new contract signed by an existing employee will not be enforceable. Finally, employers are advised to update their employment agreement templates, in order to ensure that they too will be enforceable when applied to new employees.  

The lawyers at Hyde HR Law are experts in drafting and interpreting employment contracts. Contact us today.

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