Severance Clauses: One Bad Apple Spoils the Bunch?

The enforceability of termination clauses in employment contracts has been hotly contested in recent years, particularly in Ontario.

The 2020 decision from Ontario’s Court of Appeal (the ONCA) in Waksdale v. Swegon North America Inc. is the latest judicial warning to employers on this topic, as it suggests that employers must get every termination provision in an employment agreement exactly right in order to rely on any of them.

Although the employer in this case may seek leave (i.e. permission) to appeal the ONCA’s decision to the Supreme Court of Canada, unless and until that appeal happens and succeeds, the courts have once more raised the bar for drafting enforceable termination provisions. The implication for employers (at least those in Ontario)? Review your existing employment contracts and make sure every termination provision is fully compliant with employment standards legislation.

The Facts

In October 2018, after nine months of service, Benjamin Waksdale was fired without cause from his position as director of sales for Swegon North America Inc. He received two weeks’ severance in lieu of notice.

Mr. Waksdale sued Swegon for wrongful dismissal, arguing he was entitled to significantly more severance than he had received. The employer argued that, based on the following termination clause in Mr.  Waksdale’s employment contract (the “Without Cause Provision”), his entitlement was actually limited to the one week minimum set out in Ontario’s Employment Standard’s Act (ESA):

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.

Mr. Waksdale’s contract also contained a “with cause” termination provision (the “With Cause Provision”), and a standard severability provision (which provided that if one clause of the contract was invalid, it could be “severed” from the contract and not affect the validity of the contract’s other clauses). However, both Mr. Waksdale and Swegon agreed that the With Cause Provision violated Ontario’s ESA and was therefore void. (Unfortunately, neither the Court of Appeal nor the lower court which first heard this case included the wording of this provision it its decision, so we are left to wonder what it actually said.)

Mr. Waksdale argued that the deficient With Cause Provision should invalidate the rest of the provisions in the contract dealing with termination, including the Without Cause Provision. Swegon, on the other hand, argued (seemingly reasonably) that the invalidity of the With Cause Provision was irrelevant since the employer was not relying on that clause to dismiss the employee. As an alternative argument, the employer tried to rely on the severability clause to have the With Cause Provision severed from the contract without affecting the Without Cause Provision.

Superior Court of Justice Decision

The key issue for the trial court to resolve was therefore whether the illegality of the With Cause Provision meant that the Without Cause Provision was also unenforceable. The lower court ruled in the employer’s favour.

Justice Morgan concluded that the Without Cause Provision was a “stand-alone clause” that was unambiguous, enforceable and independent from the With Cause Provision. Unlike in other cases, the two provisions were completely separate, not combined into one, and could therefore be considered independently.

Because of this, Justice Morgan rejected the idea that he had to “sever” the illegal provision in order to “save” the other, as it was obvious that the illegal clause was completely inapplicable to Mr. Waksdale’s termination. The employer was relying solely on the Without Cause Provision.

The Court of Appeal Decision

On appeal, the ONCA overturned Justice Morgan’s decision. The appellate court concluded that an employment agreement must be interpreted as a whole, not on a “piecemeal” basis, explaining that “the correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA.” For the ONCA, it was irrelevant that Swegon did not rely on the invalid With Cause Provision, because “the court is obliged to determine the enforceability of the termination provisions as at the time the agreement was executed.”

The ONCA also refused to apply the severability clause; since both termination clauses were to be understood together, the severability clause could not apply to sever the offending portion of these provisions.

In short, the ONCA decided that because the With Cause Provision violated Ontario’s ESA, the Without Cause Provision was also invalid. One bad apple spoiled the bag.

Key Takeaway

The requirements of Ontario’s ESA are distinct from those under British Columbia’s employment standards legislation. As such, it remains to be seen whether BC courts will follow the ONCA’s rationale in future decisions.

Nevertheless, the door is now open for BC employees to challenge otherwise valid termination provisions on the basis of other deficiencies in the contract. We encourage all BC employers to take a look at their existing employment contracts to make sure that all termination provisions comply with provincial legislation – and to contact us if you are in doubt!

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