New case law provides hope for employers
Employers in Ontario are understandably exhausted by the moving target that is the “enforceability” of termination provisions. Over the last few years, the courts have taken it upon themselves to level the playing field between employers and employees, such that even the smallest technical deficiency in a termination provision has resulted in it being ruled unenforceable. The math is simple – a strong and enforceable termination provision can significantly limit a company’s liability upon a dismissal. A weak (or unenforceable) termination provision gives rise to common law reasonable notice. In the wake of recent judicial decisions, employers are receiving huge demands for severance and scramble to respond to without-cause dismissals they legitimately believed were subject to enforceable contracts.
In June 2020, the Ontario Court of Appeal issued a decision Waksdale v. Swegon North America Inc., 2020 ONCA 391, that caused anxiety and frustration among employers across the province, because it radically changed the way we interpret termination provisions. Before Waksdale, courts would ignore challenges to contractual provisions that were not factually relevant to the dismissal at issue. This was a sensible approach - why argue over a term that is not relevant to the actual case?
But Waksdale held that an unenforceable just-cause provision can invalidate the entire termination provision, including the without-cause provision, even when the dismissal at issue was without cause. In other words, in a “vanilla” without-cause dismissal, in which no misconduct or breach of trust is raised, an unenforceable just cause provision could trigger an employee’s entitlements to common law reasonable notice, even if the contract otherwise quite clearly sought to limit them to the minimum entitlements under the Ontario Employment Standards Act, 2000 (ESA).
In the years that followed, other courts picked up the Waksdale torch. A particularly frustrating decision was Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029. The Ontario Superior Court of Justice identified several issues with the termination provision under consideration. Some of those issues reflected historical precedent, including the Waksdale decision. However, the court also criticized the termination provision for stating that the employer had “sole discretion” to dismiss the employee “at any time”. The court reasoned that employees have job protection while on a statutory leave of absence and against reprisal for asserting their rights under the ESA, as well as other statutes. Employees do in fact have such rights, but the termination provision at issue never claimed to contract out of the general protections afforded to employees.
The court effectively presumed a nefarious intent at the time of drafting (which incidentally never came to pass because the employee was not dismissed while on a statutory leave or following the assertion of any statutory right or protection).
Unfortunately, the court in Dufault did not give any credence to important first principles of employment law in Ontario. Specifically, employers who manage non-unionized employees have the lawful right to dismiss such employees based on performance or operational needs “at any time” and in the employer’s “sole discretion.” These fundamental management rights were what the termination provision referenced, not a scheme to discriminate or reprise against their employee.
Fortunately, the tide may be turning. In the recent decision of Bertsch v. Datastealth Inc., 2024 ONSC 5593, counsel for the employee claimed the termination provision was unenforceable on technical grounds in line with Waksdale, albeit extending the reasoning in Waksdale even further. However, the Ontario Superior Court of Justice rejected these arguments and actually struck out the claim for having no tenable cause of action. In other words, without a full trial, the employer successfully argued that the termination provision was valid and the plaintiff had no viable case to argue. Justice Stevenson addressed several common arguments made by the employee’s counsel and dismissed them one by one. Justice Stevenson stated in Bertsch:
“There is no reasonable alternative interpretation of the relevant clauses here that might result in an illegal outcome i.e., there is no reasonable interpretation which would be contrary to the minimum requirements of the ESA and regulations.
“I accept there is a presumptive power imbalance between the employer and the employee, and that any ambiguity will be read to the benefit of the employee. But I do not find any ambiguity here.
“I agree that the interpretation and application of the termination clause is not a simple matter. But that is partly because the law is not very straight forward in respect of these issues. Many a lawyer has struggled to understand the distinctions being discussed and to predict the likely outcome if one of these claims is litigated. Any employee would benefit from legal advice before signing any such agreement. But the contractual terms here, while not simple, are clear and unambiguous.”
In other words, Justice Stevenson acknowledged that there is often an imbalance in bargaining power between the employer and the employee. Moreover, understanding a termination provision is challenging because the law is complex. Nevertheless, a clear and unequivocal contract that respects and adheres to statutory minimum rights is enforceable.
Time will tell if the decisions in Dufault or Bertsch will portend the interpretation of employment agreements in the years ahead. Interestingly, the Dufault decision has been appealed and will be heard by the Ontario Court of Appeal.
Employers will be watching closely as this area of law develops, with the hope that courts will be less inclined to make policy and more willing to enforce employment contracts based on the terms that were clearly set out, even if they limit severance rights.
Lorenzo Lisi is a partner and leader of the Workplace Law Group at Aird and Berlis in Toronto. Alex Kagan is a partner and member of the Workplace Law Group at Aird and Berlis in Toronto.
