Reviewing Employment Contracts in the Aftermath of Waksdale

On January 14, 2021, the Supreme Court of Canada refused an application for leave to appeal the Ontario Court of Appeal’s judgment in Waksdale v. Swegon North America Inc. The Supreme Court’s decision was a disappointment for lawyers who represent employers because it preserved the precedent set by the Court of Appeal that invalidated many commonly utilized termination clauses. As a result, many employers have lost the ability to rely on their written employment agreements to reduce their exposure to costly severance obligations in the event that they need to terminate employees. 

What Is A Termination Provision?

The provisions of an employment contract which outline the employer’s obligations in the event of a dismissal “with cause” (i.e. following serious employee misconduct) and “without cause” are commonly referred to as “termination provisions”. 

Most employment contracts will contain a variety of basic terms that govern the employment relationship, including the details of the employee’s remuneration and duties. A well-drafted employment contract will also contain language addressing how the employment relationship may come to an end, and details about the obligations that will arise from the cessation of employment.

A termination provision that is compliant with established legal standards can have a significant impact on the quantum of an employee’s severance entitlement upon dismissal. By contrast, a termination provision that is deemed “unenforceable”, because it is not compliant with established law, will leave the employer exposed to costly severance obligations. 

Although not all termination provisions were invalidated by the Court of Appeal’s recent decision, a significant number were. 

Given the potential repercussions, the employment lawyers at SV Law recommend that all employers review their contracts and templates. This includes employers who had contracts or templates drafted as recently as last year.

What Did The Court of Appeal Change? 

The Court of Appeal’s decision in Waksdale was significant because the panel of judges analyzed the enforceability of a termination clause from a different legal angle than was historically customary. 

For many years, employment lawyers have drafted “without cause” termination provisions with a high-level of caution because such provisions, if properly drafted, can significantly reduce an employer’s severance obligation upon dismissing an employee without cause. For example, it is not uncommon for a properly drafted termination provision to reduce an employer’s severance obligation by 75 percent or more, compared to what the law would require without a proper termination provision. As a consequence, many employment lawyers became adept at drafting “without cause” termination provisions that would survive judicial scrutiny and reduce severance payable by their employer clients. 

Provisions addressing termination “with cause” typically received secondary consideration because terminations of that nature are comparatively infrequent, and because the provisions associated with dismissal “with cause” have (historically) been less relevant to the primary goal of reducing severance payable. In fact, many employment lawyers would view the complete absence of a provision addressing termination “with cause” as a minor concern at most because the right to terminate an employee with cause is a default right under the common law.

The Waksdale decision has significantly increased the level of attention and scrutiny that must be afforded to contractual provisions addressing termination “with cause” by inseparably linking them to “without cause” termination provisions. Formerly, the clauses were analyzed separately by judges. That is to say, if an employee was terminated without cause, the judge would look at the “without cause” termination provision and give no regard to the “with cause” provision. The latter was considered separate, inapplicable, and irrelevant. In Waksdale, the Court of Appeal upset this legal principle by declaring that the employer could not rely on a properly drafted “without cause” termination provision in a dismissal that was, in fact, implemented without cause because the “with cause” termination provision could theoretically conflict with the provisions of the Employment Standards Act, 2000 (ESA) or its regulations. To the Court of Appeal, it did not matter that the termination was without cause because the panel of judges viewed the termination provisions “as a whole.” In their view, it was irrelevant that the offending clause (the “with cause” provision) had no practical applicability to the dismissal that was factually without cause.

By virtue of the Waksdale decision, the provisions of a contract addressing termination “with cause” have lost their comparative unimportance and must be reviewed with the same diligence and care that was historically afforded to “without cause” provisions (specifically, because the former can now invalidate the latter).

The “with cause” termination provisions that appear to be the most vulnerable in the aftermath of Waksdale are those which list the circumstances that amount to “cause” or “just cause” for dismissal. It is not inherently improper to include such a list, but each item on the list will be scrutinized for potential incompatibility with the ESA, which will leave the clause more easily exposed to a finding of unenforceability. 

While some employers may elect to self-assess whether their termination provisions remain enforceable in the aftermath of the Waksdale decision, we recommend seeking a legal opinion from counsel. Most employment lawyers will be able to provide a professional opinion at a modest cost compared to the expense associated with even a single dismissal implemented with an unenforceable termination provision. 

If you would like some assistance in reviewing your contracts and templates, contact the experts at SV Law today.