Canada: Better Late Than Never: Employers In Canada Should Review Their Termination Of Employment Provisions

Canadian employers should review their employment contracts and update them as necessary to avoid potentially costly problems upon separation of employment.

Since early 2021 when the Supreme Court of Canada declined to hear an appeal of the Ontario Court of Appeal's decision in Waksdale v Swegon North America Inc. (2020 ONCA 391) it has been more difficult for employers in Ontario to successfully argue that their termination of employment clauses are enforceable. Ontario employers who have not updated their existing and template employment contracts since that legal development may incur unexpected costs when ending employment relationships. Employers in other provinces should take heed of Waksdale, too, as they may find themselves in similar circumstances if the decision is followed in their local jurisdiction(s).

Below we discuss the termination of employment issues highlighted in the Waksdale decision and steps employers can take to address those issues.

The Law Requires Employers to Provide Certain Entitlements to Eligible Employees When Terminating Their Employment Without Cause

Under the common law, employers may terminate an employee without cause but only if the employer first provides the employee with "reasonable notice" (or pay in lieu of notice). Employers are permitted, however, to contract out of this reasonable notice entitlement in their employment contracts. To do so, not only must the contract have the employee expressly waive the reasonable notice entitlement and identify some other clearly defined notice period (or pay in lieu of notice), but it must also contain language that complies with the minimum requirements under Ontario's Employment Standards Act, 2000 ("ESA"), including providing for notice (or pay in lieu of notice), severance pay (if applicable) and benefits at least as generous as those required under the ESA.

The ESA generally provides that unless precluded, terminated employees are eligible to receive notice (or pay in lieu of notice) and benefits continuation up to a maximum of eight weeks depending on length of service and severance pay up to a maximum of 26 weeks depending on length of service and the payroll of the employer or the size of the layoff. For example, an employee in Ontario who has completed between five and six years of service for an employer is entitled to five weeks of notice (or pay in lieu of notice) and benefits continuation and, if the employer has a payroll of $2.5 million or more, additional severance pay of one week of regular wages per completed year of service plus a prorated amount for each additional completed month of service during the year in which the termination of employment occurs. There are also special rules to determine the amount of notice and severance pay required in the case of mass terminations where the employment of 50 or more employees is terminated at an employer's establishment.

On the other hand, common law reasonable notice can be significantly longer than ESA notice with periods up to and occasionally exceeding two years and is determined on an employee-by-employee basis depending on a number of factors, generally being the "Bardal Factors" (e.g., character of employment, length of service, age of the employee, availability of similar employment and the employee's experience, training and qualifications) (Bardal v Globe & Mail Ltd. (1960 CanLII 294 (ONSC))).

Employers, not surprisingly then, often seek to exclude common law entitlements in their employment contracts and elsewhere, such as their incentive compensation arrangements. However, if the employment contract does not comply with the ESA's technical requirements, then the employer will be back on the hook to provide reasonable notice to the employee under common law standards. In other words, proper drafting of employment contracts is critical.

The Law Precludes Employees from Receiving Notice and Severance Pay For Cause-Based Terminations

Both the common law and the ESA do not require the provision of termination entitlements to employees who are being fired for cause. But, the common law and the ESA view cause differently.

Generally, under the common law, employees may be summarily dismissed for "cause" if they are guilty of serious misconduct, habitual neglect of duty, incompetence, or conduct incompatible with their duties or prejudicial to the employer's business, or if they are guilty of wilful disobedience to the employer's orders on a matter of substance (R. v Arthurs, Ex p. Port Arthur Shipbuilding Co. (1967 CanLII 30 (ONCA), rev'd on other grounds [1969] SCR 85). However, under the ESA, "cause" only amounts to "wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer" (Section 2(1)(3) of Ontario Regulation 288/01 under the ESA).

Accordingly, the ESA applies a "wilful" standard to both misconduct and neglect of duty whereas the common law does not. As a result, employers who reference the broader common law standard in their employment contracts may still be required to provide statutory notice (or pay in lieu of notice) and severance pay (if applicable) to an employee where the termination does not meet the narrower statutory wilful misconduct or neglect of duty standards.

This important distinction presents a common drafting pitfall for employers who do not sufficiently bifurcate the two standards in their for cause termination provisions. This was a salient component of the Court's decision in Waksdale.

The Waksdale Court Requires Common Law Reasonable Notice Because of an Incorrectly Drafted Cause Provision

In Waksdale, the employee plaintiff conceded that his employment contract's without cause termination provision complied with the minimum requirements under the ESA, but argued that it should be voided and he should be entitled to common law reasonable notice instead because the contract's separate for cause provision was noncompliant with the ESA even though the employer did not try to terminate his employment for cause. The Court agreed, providing him with a richer common law reasonable notice entitlement rather than the contract's contractual notice entitlement, simply because the separate for cause provision was not drafted in a sound manner.

The Court also refused to rely on the contract's severability provision to separate the unenforceable for cause provision from the other termination provisions, finding instead that the termination provisions should be read as a whole and that if one provision was unenforceable then all were unenforceable.

The Court has since followed the Waksdale approach in Rahman v Cannon Design Architecture Inc. (2022 ONCA 451) and a slew of lower court decisions in Ontario have done the same (see para. 9 of Summers v Oz Optics Limited (2022 ONSC 6225)).

Waksdale Shows Employers That They Would be Well-Served to Review Their Employment Contracts

Waksdale is an employee-friendly decision signifying that flaws in one termination of employment provision can jeopardize the enforceability of all other termination of employment provisions.

It is common practice for employers in Ontario to include both for cause and without cause termination of employment provisions in their employment contracts and to supplant employees' entitlement to common law reasonable notice. Because Ontario's statutory "cause" standard differs from the broader common law standard, provisions that fail to distinguish the two may be noncompliant with the ESA and consequently, jeopardize the enforceability of the other termination provisions included in the contract (see, for example, Render v ThyssenKrupp Elevator (Canada) Limited (2022 ONCA 310) at para. 79). Relatedly, provisions that do not account for minimum statutory requirements upon a termination without cause are likely to be noncompliant and therefore unenforceable.

Ontario employers should scrutinize their contractual provisions for existing employees and new hires and make any necessary revisions to ensure that they are likely to be upheld if challenged. Notably, fresh consideration, such as a raise in salary or an off-cycle bonus payment, is generally necessary to give effect to any revised contract with an existing employee.

Though it remains to be seen whether Waksdale will be adopted by courts outside of Ontario, decisions of the Court are persuasive in other jurisdictions and plaintiff employees in other provinces, while unsuccessful so far, have sought to rely on Waksdale (see, for example, Pederson v Brandt Developments Ltd. (2021 SKPC 35) at para. 32, Shultz v Prococious Technology Inc., dba Cleardent (2022 BCSC 1420) at para. 25, and McMahon v Maximizer Services Inc. (2023 BCSC 4), at para. 25). Accordingly, employers across Canada would be wise to conduct a similar review of their employment contracts. Otherwise, they may unexpectedly find themselves liable for termination entitlements that they did not bargain for.

Mintz's Canadian Employment Practice will continue to monitor this issue closely and stands ready to assist employers as needed.