Battle of the clauses: what does it take for the Court to uphold a termination clause?

Oct 23, 2019

Two recent Ontario Superior Court of Justice (“the Court”) decisions shed light on what types of termination clauses will be upheld and which will be deemed void and therefore unenforceable. This blog discusses both these decisions.

🅇      Unenforceable termination clause – Groves v UTS Consultants Inc., 2019 ONSC 5605

In Groves v UTS Consultants Inc., the Plaintiff, Wayne Groves (“Mr. Groves”) founded the Defendant Company, UTS Consultants Inc. (“UTS”) in 1992. However, in November of 2014, Mr. Groves sold all of his shares to Oakville Enterprise Corporation (“OEC”). He resigned from his position as a director and officer but continued to work as a senior manager for UTS until he was terminated without cause in 2017. Mr. Groves also signed a new employment agreement with UTS upon selling his shares to OEC.

 The termination provision in the agreement stated as follows:

This agreement may be terminated in the following manner in the specified circumstances:

b) By the Company at any time for cause without notice or pay in lieu;

c) By the Company at any time without cause provided that the Company provides you with notice in writing or pay in lieu of notice (as salary continuation) or some combination thereof equal to four (4) weeks base salary for each year of service that you have with the Company calculated from the date of this letter (and, for greater certainty, excluding any period of service you had with the Company prior to the date of this letter) with a guaranteed minimum notice or pay in lieu of notice equal to three (3) months base salary; provided that the maximum notice period or pay in lieu of notice that you will receive shall in no circumstances exceed twelve (12) months. Notwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the Employment Standard Act (Ontario). In addition, the severance package will also include continuation of medical and dental benefits during the severance period. Any variable pay owing to you will be prorated for the year’s service and paid at the time of termination. For greater certainty, you agree that for purposes of calculating any entitlement which you may have arising from the termination, without cause, of your employment with the Company, any prior service with the Company is excluded and you hereby waive and release any prior service entitlements.

Mr. Groves claimed that the termination clause failed to comply with the Employment Standards Act (“the ESA”) for four reasons: 

  1. The clause purported to waive termination pay and severance pay entitlements under the ESA;
  2. It provided for termination pay and severance pay to be determined based on “base pay” only;
  3. The termination clause permitted termination without notice for just cause, as opposed to the ESA standard of wilful misconduct; and
  4. The clause had no provision for severance pay if pay in lieu of notice was provided.

In response to Mr. Groves’ first argument, UTS claimed that he had resigned in November 2014 and was re-hired as shown by him signing a new employment agreement. Accordingly, he did not qualify for severance pay as he had been working for UTS for less than five years. 

The Court, however, agreed with Mr. Groves and found that the termination clause did not comply with the ESA and was thus void and unenforceable. This was because the clause stated that prior service would be excluded for the purposes of calculating any entitlement. The Court clarified that any entitlement would include termination and severance pay. Ultimately, the clause violated section 9(1) of the ESA which clearly states that if an employer sells a business and the purchaser employs an employee of the seller, the employee’s employment shall not be considered to be terminated or severed. Thus, the Court reiterated that UTS was required to include Mr. Groves’ pre-2014 service when calculating his ESA entitlements, which it had failed to do. 

UTS further attempted to rely on Mr. Groves’ resignation back in 2014 to demonstrate his non-entitlement to severance pay. The Court further rejected this argument stating that while Mr. Groves had resigned from his position as director and officer, he continued to be an employee of UTS. Thus, his 2014 resignation did not amount to a clear and unequivocal resignation from UTS as a whole. 

The Court also agreed with Mr. Groves’ second argument stating that the termination clause was unenforceable since it based termination and severance pay on base salary alone. The Court clarified that according to the ESA, employees are entitled to their regular wages as well as the continuation of all employee benefits. The termination clause neglected to mention variable pay, pension contributions or vacation pay which constituted a form of wages or benefits and should have been maintained during the notice period. As such, the termination clause was further void and unenforceable. 

Since the Court had already declared the termination clause to be in violation of the ESA, it did not feel the need to address Mr. Groves’ last two submissions. 

The Court did, however, address UTS’ argument that the termination clause contained a saving provision. Specifically, the saving provision stated that “notwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the Employment Standard Act (Ontario).” 

The Court, relying on Rossman v Canadian Solar Inc., 2018 ONSC 7172 stated, “when the employer has sought to contract out of the ESA, a saving provision cannot be used to rewrite the express language in an agreement to cause it to comply”. In this case, since the termination clause violated section 9(1) of the ESA by failing to account for Mr.Groves’ prior service with UTS, the saving clause could not be used to bring the clause into compliance with the ESA. 

 

☑      Termination clause upheld – Waksdale v Swegon North America Inc., 2019 ONSC 5705

In contrast to the above decision, the Court upheld the termination clause in Waksdale v Swegon North America Inc. In this decision, the Plaintiff, Benjamin Waksdale (“Mr. Waksdale”), was a Director of Sales who began his employment with the Defendant Company, Swegon North America Inc. (“Swegon”) in January of 2018. He was terminated without cause a short while later in October 2018. 

Mr. Waksdale had signed an employment contract in December 2017 which contained the following termination provision:

Termination of Employment with Notice

You agree that in the event that your employment is terminated without cause, you shall receive one week notice or pay in lieu of such notice in addition to the minimum notice or pay in lieu of such notice and statutory severance pay as may be required under the Employment Standards Act 2000 as amended. All reimbursement for business expenses shall cease as of the date of termination of your employment, however, you shall be reimbursed for legitimate business expenses that have been incurred and submitted to the Company but not as yet paid you to that date. The terms of this section shall continue to apply notwithstanding any changes hereafter to the terms of your employment, including, but not limited to, your job title, duties and responsibilities, reporting structure, responsibilities, compensation or benefits.

The employment agreement further contained a second termination provision in the event that the employee was terminated with cause. In this case, Mr. Waksdale submitted that it was this second with cause termination provision that violated the ESA. Swegon further admitted that the with cause termination clause was in violation of the ESA; however, this invalidity was irrelevant since Mr. Waksdale had not been terminated for cause. 

The employment agreement also contained a severability clause which stated: 

You agree that if any covenant, term, condition or provision of this letter outlining the offer of employment with the Company is found to be invalid, illegal or incapable of being enforced by a rule of law or public policy, all remaining covenants, terms conditions and provisions shall be considered severable and shall remain in full force and effect. 

Mr. Waksdale argued that the one defective clause rendered the entire agreement void and unenforceable. In the alternative, he argued that both termination clauses should be found unenforceable since one was clearly not in compliance with the ESA. 

In support of their argument, Mr. Waksdale and his counsel emphasized that the ESA is designed to protect employee rights, as stated in the Supreme Court of Canada decision of Machtinger v HOJ Industries Ltd., [1992] 1 SCR 986. 

Nevertheless, the Court reiterated that “this principle cannot be stretched to the point of finding ambiguity where none exists”. The relevant termination clause for a without cause dismissal was unambiguous, enforceable, and stood apart from the Termination for Cause clause. The Court stated that there was no need to sever anything as the termination for cause provision was not relevant in this particular situation as Mr. Waksdale had been terminated without cause. Ultimately, the appropriate provision to examine was the without cause provision. This provision was in compliance with the ESA and thus enforceable. Ultimately, the Plaintiff’s action was dismissed and the Court found in favour of the employer. 

 

Lesson to be learned 

Employee counsel frequently attack the termination clause in an employment contract. There are scores of court cases addressing this issue each year and a number of these cases are appealed to the Ontario Court of Appeal each year. In fact an employer should expect that the termination clause in its employment contract will be carefully scrutinized by a judge.  Thus, it is very important to ensure that your organization’s standard employment contract contains a termination provision that complies with the ESA. Otherwise, you risk a court finding that the termination clause is void and unenforceable thus entitling the employee to common law notice, which is typically much higher than the minimum notice of termination required under the ESA.

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