The Ontario Court of Appeal’s latest decision striking down attempts to control severance cost

A key way employers control severance cost risk is to hire employees under written employment contracts that specifically limit what the employee’s severance entitlements will be upon termination.  Valid contractual termination provisions preclude Canadian courts from applying the common law doctrines that can lead to severance packages of up (and sometimes exceeding) to two years’ compensation.  However, Canadian courts often take a hostile approach to contracts purporting to limit severance amounts to less than the employee would be entitled under common law and have issued multiple rulings striking down contractual severance provisions.  Where a court finds that a contractual severance provision is invalid—for example because it fails to comply with the minimum statutory requirements contained in employment standards legislation – the court will refuse to enforce the provision and instead declare that the provision is unenforceable and award the employee a severance package far in excess of the contractual amounts. 

The Ontario Court of Appeal’s latest decision to invalidate a contractual severance provision, Waksdale v. Swegon North America Inc., highlights the Court’s reluctance to enforce such provisions and illustrates how a provision in the contract that the employer does not attempt to rely on may nevertheless render all of the severance provisions in the contract unenforceable.  It also suggests steps that employers should take to minimize risk.

The problem with the contract

The contract contained a sentence that said no notice or severance would be provided if the employee was dismissed for cause.  The employer conceded that this “for cause” provision was invalid because it contravened the Employment Standards Act, 2000 (the “ESA”). Pursuant to the ESA, an employee who is dismissed for cause may still be eligible for statutory notice and  severance pay, as applicable, if the employee’s misconduct did not amount to “wilful misconduct or gross neglect of duty.”

The employee’s attempt to have all contractual severance provisions declared void

Although the employee was not dismissed for cause, the employee argued that, since the employer conceded the invalidity of the “for cause” provision, the remaining contractual severance provisions were also invalid.  Thus, the employee sought to have all of these provisions declared void, in their entirety, and asked the court to award the employee a severance package of 6 months’ pay based on the relevant common law doctrines – an amount far in excess of the 2 weeks’ pay that the employee had received pursuant to the “without cause” provision in the contract.

The employer’s defence

The employer argued that because the employee was not dismissed for cause, the illegal “for cause” provision should be inconsequential and that the employee’s severance entitlements should still be governed by the “without cause” termination provision since the language of that provision complied with the ESA, that provision was in a different paragraph from its illegal counterpart, and the contract specifically included the following severability clause:

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.

The employer maintained that each contractual severance provision should be considered separately; that the illegality of the “with cause” provision should have no impact on the validity of the “without cause” provision, because these could be severed from one another by application of the severability clause. The employer relied upon an earlier trial court decision finding that an illegal “cause” provision could be treated as separate and distinct from a legally valid “without cause” provision.

The Court’s analysis and findings

The Court made it explicit that the overriding principle is that employers will only be allowed to rely on employment contracts which are, as written, in complete compliance with the ESA:

Recognizing the power imbalance between employees and employers, as well as the remedial protections offered by the ESA, courts should focus on whether the employer has, in restricting an employee’s common law rights on termination, violated the employee’s ESA rights. While courts will permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal.

The Court explained that the fact that the employer was not relying on the illegal “for cause” provision in this case was irrelevant.  The Court emphasized that the validity of the contractual severance provisions in an employment contract must be determined as at the time the contract was executed (not when a termination occurs), and contractual severance provisions must be considered as a whole – even if they appear as separate paragraphs or in different parts of the contract, they are inextricably linked and cannot be considered on a piecemeal basis. 

Based on the foregoing, the Court found that the contractual severance provisions when considered as a whole, were unenforceable and void in their entirety as at the time the contract was executed.  Then, having determined as much, the Court concluded that there were effectively no (valid and enforceable) termination provisions left in the employment contract for the severability clause to save, noting:

A severability clause cannot have any effect on clauses of a contract that have been made void by statute.

As a result, the plaintiff’s severance entitlements were not limited by the contractual severance provisions in the contract, and the plaintiff’s claim for wrongful dismissal damages under the relevant common law doctrines was allowed proceed.

What this will mean going forward

This appellate level decision provides clarity on an issue that had only been previously considered at the trial level. Going forward, we expect that plaintiff lawyers will try to point to any perceived flaw in any contractual provision that can be related to the employee’s severance entitlements, and will argue that the flaw renders all contractual severance provisions unenforceable and void in their entirety ,even if (i) the contract includes a valid severability clause and (ii) the provision is separate and distinct from the rest of the severance language. 

Risk management steps:

  1. Update all employment contract templates in view of the expanding caselaw – ensuring contractual compliance with the ESA in all termination scenarios, with or without cause – which is of paramount importance.
  2. In assessing contractual compliance with the ESA, consider all contractual provisions related to termination or severance entitlements.
  3. Be mindful of the courts’ policy objectives, which are primarily to ensure that all employers use employment contracts that fully comply with the ESA. The courts have indicated they are unprepared to use severability clauses to ‘cure’ termination clauses by reading out illegal provisions.
  4. Review current written employment contracts to assess compliance with the ESA in all hypothetical circumstances and determine whether amendments are appropriate.  In developing amending agreements, remember that under the common law, employers must provide employees with fresh consideration in exchange for accepting binding amendments to their existing employment contracts.
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Editors

Lawrence E. Ritchie

Partner, Litigation

Alexander Cobb

Partner, Litigation

Shawn Irving

Partner, Litigation

Kevin O’Brien

Partner, Litigation

Lauren Tomasich

Partner, Litigation

Malcolm Aboud

Associate, Litigation