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Time to revisit employee contracts after recent court decision

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Labour costs in Canada increased to 112.10 points in the first quarter of 2020 from 110.94 points in the fourth quarter of 2019.  Added to this are the losses in revenue and increased costs of doing – or not doing business – during the COVID-19 pandemic and the declared state of emergency.

Notwithstanding the unprecedented uncertainty and instability of the COVID-19 realities on businesses in Ontario, the Ontario Court of Appeal in its June 2020 decision in Waksdale vs. Swegon North America Inc., determined it was appropriate to effectively make the majority of  employment contracts’ unenforceable if any provision in them is contrary to the Ontario Employment Standards Act (the ESA).  So, if employers need to terminate to “right size” given their financial situation, assuming their employees are not on a job-protected Infections Disease Emergency Leave under the ESA, this may be far more costly than was previously the case before the Waksdale decision.

Why? Because the Court determined that employment contracts that include a just cause termination clause that states “the employee can be terminated without notice [or pay in lieu] for just cause” are unenforceable – even if this just cause clause is not being relied on at the time of termination because it is in breach of the ESA. Meaning, it does not matter whether the termination of the employee is with or without cause.  Even if the termination is without cause and the applicable without just cause termination clause in the contract is enforceable, the fact that the just cause clause is in the contract voids the termination provisions. It also does not matter if the contract has a severability clause.  It only matters that the offending just cause clause is in the contract.  As a result, all of the termination provisions in the contract will be unenforceable and the employee will be entitled to their far greater entitlements of reasonable notice under the common law.

How did the Court come to this decision?  As noted by the Court, the ESA is remedial legislation that should be interpreted as broadly as possibly to protect the interests of employees and encourage employers to comply with its minimum statutory protections. Layered on top of this, the Court reasoned that the enforceability of a contract’s termination provisions must be determined on the language used at the time the contract was signed and not at the time its language is being applied (i.e., at the time of at termination).  The reasoning is: if there is an unenforceable termination clause in the contract, even if not relied upon, the entire contract is nullified as the contract must be interpreted as a whole.  The Court held that this is specifically the case even if the contract contains a severability clause that permits the removal of any unenforceable part of the contract as such a clause “cannot have any effect on clauses of a contract that have been made void by statute”.

Why?  The common law definition of “just cause” does not generally accord with the ESA and its regulations’ definition of conduct that disentitles an employee to receive notice upon termination.  As such, there are circumstances where an employee can be found disentitled to reasonable notice but still entitled to their ESA entitlements upon termination.  Added to this, employers commonly attempt to expand the definition of “just cause” to conduct that goes either of the common law and ESA definitions.

What does this decision mean for employers? While many employment lawyers opine that the Waksdale decision is wrongly decided, particularly in its treatment severability clauses, employers should immediately revisit all of their employment contracts and seek expert legal advice on their enforceability.  Templates for new hires and current employee contracts must be reviewed to ensure that they meet the Waksdale test.  If they don’t, new employment contracts are needed for both new hires and current employees in order to reduce employer liability at the time of termination. For current employees this can add additional unexpected costs at a time it can least be afforded in our COVID-19 economic reality, as the enforceability of new or amended employment contracts for current employees is contingent on sufficient fresh consideration being provided (e.g., raise, benefits or greater benefits, more vacation, a one-time payment or a change in position). Continued employment is not fresh consideration.

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