As COVID-19 seemed to put the world on “hold” for some time in 2020, Ontario courts were still busy at work releasing decisions with significant implications for employers. While we generally expect court decisions to resolve uncertainties in the law, I want to highlight three recent decisions which increase the legal uncertainties facing Ontario employers.
Waksdale v Swegon – a troubling decision with unclear implications
On June 17, 2020, the Ontario Court of Appeal dropped a potential bombshell in Waksdale v Swegon North America Inc., 2020 ONCA 391. This decision stands for the proposition that, if any part of the termination provision in an employment contract is unenforceable (such as the “for cause” clause), the entire termination provision is unenforceable and the employee will be awarded common law reasonable notice of termination.
Waksdale was an appeal from a summary judgment decision. At the motion for summary judgment, the employer admitted that its “just cause” termination clause violated the Employment Standards Act, 2000 (the “ESA”) (frustratingly, because of this admission, we don’t know what the clause said). However, the employer argued that the illegality of the “just cause” clause was irrelevant to the enforceability of the “without cause” clause, given that they were separate clauses and that the plaintiff was terminated without cause, therefore not in reliance on the illegal “for cause” clause.
The Court of Appeal disagreed [my emphasis]:
10 We do not give effect to [the employer’s] submission. An employment agreement must be interpreted as a whole and not on a piecemeal basis. The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate 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. In conducting this analysis, it is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are by their terms otherwise linked. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach without regard to their combined effect.
11 Further, it is of no moment that the respondent ultimately did not rely on the Termination for Cause provision. The court is obliged to determine the enforceability of the termination provisions as at the time the agreement was executed; non-reliance on the illegal provision is irrelevant.
In other words – it doesn’t matter how the parties structure the employment contract, nor does it matter how such structure may reflect the parties’ intentions. The court will look at all “termination provisions” monolithically, even if doing so is inconsistent with the contractual structure chosen by the parties.
This case could lead to a new wave of employment litigation for one simple reason: most employment contracts in Ontario include a “just cause” termination clause, many of which arguably violate the ESA. “Just cause” is a common law concept, not a concept in the ESA. In fact, the ESA does not allow “just cause” terminations without notice or pay in lieu. The ESA only allows terminations without notice/pay in lieu or severance pay if the employee is guilty of “wilful misconduct, disobedience or wilful neglect of duty which is not trivial and which has not been condoned by the employer” (I’ll call this the “ESA Standard”).
The ESA Standard arguably sets a higher bar than the common law concept of “just cause”. As such, if an employment contract states that the employee may be dismissed without notice or pay in lieu for just cause without otherwise qualifying that statement with reference to ESA minimum entitlements the employee may have, then the clause is – so the argument goes – an attempt to contract out of the ESA and is void.
Until Waksdale, this was generally not a problem in most circumstances. Previous case law on this very issue confirmed that if the “just cause” and “without cause” provisions were structurally separate in an employment contract, the illegality of the “just cause” provision would only render itself void and the “without cause” provision would remain in force (see for example Khashaba v Procom Consultants Group Ltd., 2018 ONSC 7616 (CanLII)). But Waksdale now suggests that, if one clause is tainted, they all are – and all will be struck, even if the “without cause” provision is otherwise enforceable on its own.
Waksdale is the latest example of a court going to unprecedented lengths to void an ESA minimums termination clause. The court expressly declined to interpret the contract in a manner which gives effect to the parties’ apparent intention to use the ESA’s termination provisions in a termination without cause scenario. Instead of giving due weight to the parties’ intent, the court relied exclusively on policy grounds to invalidate the clause.
So how should employers respond to Waksdale? It depends on many factors, most important of which is the termination language used by employers in their contracts. Employers should have their existing contracts and template contracts reviewed by an employment lawyer to determine if any changes or updates are needed. More broadly, in employment contracts that only provide for ESA minimums anyway, it may be time to rethink the standard “just cause” and “without cause” structure. There may be no upside, and significant downside, to relying on the common law concept of “just cause” to disentitle the employee to notice of termination or termination pay if the contract provides for ESA minimums only.
The decision may be appealed to and overturned by the Supreme Court, or it may be distinguished or otherwise restricted in future trial decisions. Until then, employers should be aware that the Waksdale case arguably represents a significant change to the courts’ interpretation of termination clauses.
Rutledge v Canaan – if a termination clause could violate the ESA, it does violate the ESA
Staying on termination clauses, the recent decision of Rutledge v Canaan Construction Inc., 2020 ONSC 4246 confirms that a termination clause which could violate the ESA because of some potential future event(s), no matter how unlikely or remote, is illegal from the outset and will not be enforced by the court.
In Rutledge, the employer was a construction company and the employee was a construction worker for the purposes of the ESA. The ESA exempts construction employees from notice of termination, pay in lieu of notice and severance pay. The employee’s contract included a termination clause which reflected that exemption. It stated that: the employee would be given the minimum period of notice required by the ESA; the employee was not entitled to any notice or pay in lieu due to the nature of his job; and the employee’s termination entitlements were strictly limited to those in the contract.
The court held that there was a possibility – however remote or unlikely – that the employee would stop being a “construction employee” at some point during his employment (maybe he would move into an office position!), at which time the termination clause would provide less notice of termination than the employee was entitled to under the ESA. The termination clause was therefore illegal and void from day one.1 Similarly, the clause expressly precluded the employee’s entitlement to ESA severance pay. While the employee had no entitlement to ESA severance pay when his employment ended because the employer (a small business) had Ontario payroll of less than $2.5M, the court held that the business could grow in size such that its employees could be entitled to severance pay. As such, by purporting to exclude severance pay even if the business grew, the clause was illegal and void.
While the Court’s decision regarding the unlikely possibility that the employee would cease to be a construction employee at some point in the distant future is at least plausible, its reasoning regarding severance pay is irreconcilable with s. 9 of O Reg 288/01, which provides that “construction employees” are not entitled to severance pay. In other words, even if the employer grew to have a payroll exceeding $2.5M, the employee would never be entitled to ESA severance pay unless he ceased being a construction employee. The court did not appear to consider that issue.
The Rutledge case is not a departure from previous case law, but it is a recent example of the onerous scrutiny that will be applied to termination clauses by the courts. To be enforceable, the contract must comply with the ESA in any potential termination scenario.
Battiston v Microsoft – calculating damages for lost bonus during notice period
Employers with bonus or stock option plans should take note of the lower-profile case of Battiston v. Microsoft Canada Inc., 2020 ONSC 4286. Most of the case is relatively straightforward and uncontroversial, but the court’s approach to calculating damages for the employee’s lost opportunity to earn a bonus during the notice period is troubling.
The court concluded that the employee was wrongfully dismissed and was entitled to damages for the lost bonus during the 24-month notice period. One issue was how to calculate those damages. The annual bonus was based on performance. The evidence suggested his performance had deteriorated for years. In the year his employment was terminated, his performance was very poor, and he was not given a bonus.
The traditional approach when awarding damages for wrongful dismissal is, in short, to award damages which put the employee in the same financial position he/she would have been in if the employer had given working notice of termination (see for example O’Reilly v. Imax Corporation, 2019 ONSC 34 at paras 43 – 46, aff’d 2019 ONCA 991). On that basis, the employer argued that the employee should not be awarded damages for the lost bonus, because the evidence suggested that his performance would not have improved during the notice period and he therefore would not have earned a bonus during the notice period.
The court instead held that the “proper” measure of damages for a lost bonus during the notice period is “based on the average of the amounts that were awarded for such bonuses in the two-year period preceding his termination”. The court cited Singer v. Nordstrong Equipment Limited, 2018 ONCA 364 as if that case supported that proposition, averaged the employee’s prior bonus amounts over the previous two years, and awarded that amount as damages.
However, Singer does not support the proposition that the universally proper measure of damages for a lost bonus is a two-year average of the prior bonus years. In the Singer trial decision which was upheld on this point by the Court of Appeal, the court concluded that the employee should be awarded damages equal to the two-year average of the prior bonus years in the circumstances of that case. Given the facts of the case, the court concluded that a two-year average would approximate the bonus amount the employee would have earned had he worked through the notice period. Neither the trial decision nor the appeal decision suggest that this approach should be universally applied, whatever the factual circumstances. As such, our hope is that courts decline to follow Battiston on this issue in future decisions.
There is never a dull moment in Ontario employment law, and these recent court decisions again highlight why employers should pay close attention to new legal developments and ensure their contracts and risk-mitigation strategies are up-to-date. Of course, if your organization requires any employment law assistance, feel free to reach out to any member of Siskinds LLP’s Labour and Employment Group.
1 In obiter, the court noted that the decision may have been different if the contract included a clause which stated that the construction employee termination clause “applies only to him while occupied as a construction employee and that it would be of no force or effect if his position changed.”