Contracting out of Common Law

This issue of contracting out of common law has received much attention in recent years.

An Otherwise Valid Agreement

This review presumes that there is a validly created contract. Regard may be had to the issues of consideration, and/or a substratum argument, or a misrepresentation plea which led to the establishment of the contract, or equitable issues such as unconscionability, in the event that a preliminary challenge to the contract is intended.

An argument also possibly, depending on the context, may be considered of repudiation, which supposes a valid contract, yet one which has been rendered unenforceable due to circumstances of its violation.

A more detailed analysis of provisions of the Ontario Employment Standards Act is reviewed here.

There has been a noticeable change in the judicial review of termination clauses in the last ten years. Earlier decisions which are inconsistent with these recent decisions have been noted separately. Generally, these older cases are inconsistent with modern authorities. A recent decision of the Ontario Superior Court noted that appellate decisions on this issue have "demanded stricter standards to achieve compliance with the ESA since the Oudin case in 2015. ¹

The Supreme Court of Canada recently suggested in Matthews that a restrictive clause in an employment agreement must be “adequately brought to the employee’s attention”. The statement was clearly obiter as the case did not turn on this issue as it was not argued, but the point nonetheless was made. ²

Rules in Reading the Termination Clause

The Ontario Court of Appeal in 2017 set out the principles for interpreting a termination clause in an employment contract. ³ They are as follows:

Consideration should be given to the fact that employees are not in a position of equal bargaining power;
Employees are generally unfamiliar with the employment standards protections and are hence less likely to challenge termination clauses;
The ESA is remedial legislation and the court should favour interpretations of the Act which encourage employers to comply with its protections and extend its protections to employees;
The ESA should be viewed in a manner which encourages employers to offer contracts which are compliant with the Act;
A termination clause will rebut the presumption of common law fair notice only if its wording is clear;
Courts should prefer an interpretation of the termination clause which gives the greater benefit to the employee.

These interpretative directions were expanded upon in a 2019 Ontario Court of Appeal decision. ⁴ The contract in this instance contained a “saving provision” intended to insure that the minimum standards were met.

It also stated that benefits would cease after 4 weeks following termination, which would put the contract offside the Act, after 5 years of service. At the time of termination, the plaintiff was entitled to 3 weeks of benefits. This clause was then seen as unenforceable as it showed a potential violation of the ESA. The issue was whether the saving provision would do just that and save the day. The document, in part, read as follows:

In the event the minimum statutory requirements as at the date of termination provide for any greater right or benefit than that provided in this agreement, such statutory requirements will replace the notice or payments in lieu of notice contemplated under this agreement.

…..Benefits shall cease 4 weeks from the written notice. [Emphasis added] ⁵

The issues were whether the agreement was void ab initio, and secondly, if not, was it ambiguous. The Court of Appeal and the motion judge both saw the agreement as void, and in any event, ambiguous.

The appellate court, notably, also spoke to a policy issue in the construction of such a saving provision in this context:

I make a final observation. Employees need to know the conditions, including entitlements, of their employment with certainty. This is especially so with respect to an employee’s termination – a fragile moment of stress and uncertainty.

[40] In this context, saving provisions in termination clauses cannot save employers who attempt to contract out of the ESA’s minimum standards. Holding otherwise creates the risk employers will slip sentences, like the four-week benefits clause, into employment contracts in the hope that employees will accept the terms. This outcome exploits vulnerable employees who hold unequal bargaining power in contract negotiations. Moreover, it flouts the purpose of the ESA – to protect employees and to ensure that employers treat them fairly upon termination: Machtinger, at pp. 1002-3.

[41] While employers are entitled to contractually amend the ESA’s notice requirements, as long as they respect the minimum standards, they are not entitled to offend them. Employers must have an incentive to comply with the ESA’s minimum notice requirements. They cannot be permitted to draft provisions that capitalize on the fact many employees are unaware of their legal rights and will often refrain from challenging notice provisions in court: Machtinger, at p. 1004. Attempting to reconcile the provisions of the Termination Clause with the benefit of hindsight runs counter to the remedial purpose of the ESA.

These decisions provide a concise summary of the interpretative principles with respect to the termination clause. They are considered the bell weather for the interpretation of such a term in Ontario employment contracts. The case law in the two sections immediately below precedes Wood but may be relevant for other jurisdictions.

A defective contract cannot be cured by later voluntary compliance ⁷ Similarly, an argument that the plaintiff’s degree of sophistication or the fact that the employee has taken independent legal advice avoids the need for conformity to the statute will fail. ⁸

Interpretation of the Incentive Clause

The rules of interpreting the entitlement of the employee to incentive or similar payments which arguably would have fallen due in the notice period are somewhat different from the above. This issue is reviewed here.

The Wording Must Be Clear to Avoid Common Law

Boule v Ericatel, a B.C. Supreme Court decision released in June of 1998, is reflective of the need to do careful drafting when attempting to contract out of common law entitlements.

The facts were as follows. Boule was employed by Ericatel from March 1983 to July 24, 1996, including related corporations. He was hired first by Westronics, which was bought by Ericsson in 1985. This company changed its name to Cable & Wireless in 1989, and was then acquire by Ericatel in March of 1993 as an asset purchase.

Ericatel promised that Boule was to receive an offer of employment on terms at least equal to those Cable & Wireless. The contract of employment with Ericatel stated termination entitlement was to be one week’s notice or pay in lieu for each year of employment in addition “to whatever entitlement you may have under the applicable provincial law”, the latter words leading to the litigation.

It had been the practice of Cable & Wireless had been to provide one month of pay for each year worked in lieu of notice. The written policy stated notice would be given, or pay in lieu “on a service related scale in accordance with applicable Provincial legislation”.

The trial judge found that the termination provision was ambiguous and uncertain, by the use of the words “provincial law”. Although ambiguous, the court found that this finding did not resolve the issue. The court did hold, however, that to contract out of the common law claim, required a clear notice provision, which was absent on these facts. The claim was determined by common law principles.

A High Level of Clarity

This sentiment was also apparent in the April 2005 Nova Scotia Court’s decision in Hoadley v Manpower Services. The court emphasized that a contract which is intended to contract out of the common law entitlements must clearly specify some other notice period and use a “high level of clarity”. In this case the court found that the executed agreement, which contained a limiting clause allowing only statutory entitlements had been intended to apply to persons assigned by the defendant to external placements and not to pertain to direct employment as was the case at bar.

This issue was again considered in the January 2006 decision of Justice R. R. Holmes of the BC Supreme Court in Dodich v Leisure Care Canada. The plaintiff was employed by the defendant as Manager, Recreation Services of a seniors’ residence in Vancouver. The clause in question read as follows:

Should it be necessary, Lifestyle may end the employment relationship by providing you with a minimum of two (2) weeks notice, or pay in lieu of notice, or such that is required by the Employment Standards Act, whichever is greater. In any event, we guarantee that you will be provided with compensation upon the severance of the employment relationship, on a without cause basis, which shall not be less than two (2) weeks per year of service. This payment will include any statutory obligations Lifestyle may have under the Employment Standards Act.

The court held that this wording did not suggest an upper limit and the presumption of common law notice was not clearly rebutted. It also determined that the clause was ambiguous. Given that the statutory payment is mandatory, no contract is required to compel payment of the sum due its terms. As no maximum sum is contemplated, it hence left open the interpretation, that if notice at common law was less than 2 weeks per year, the guarantee would apply. Given the ambiguity, contra proferentem was used to construe against the drafter and hence there was found to be no exclusion of the common law.

Ashton, J. again considered the wording of a termination provision in Dwyer v Advanis Inc., a decision of the Ontario Superior Court released in May of 2009. The court decided the case on a substratum argument and hence the commentary on the original contract of employment is obiter.

The initial contract contained the following wording:

“should it be determined at any time there is not a fit between your skills and the requirements of the job your employment at Advanis will be terminated and you will receive severance as determined by the applicable provincial Employment Standards Act.”

The plaintiff was promoted to a more senior position and executed an amended employment contract which did not repeat this term.

The court did, nonetheless, state that the original severance term would, in any event, have been not applicable as the reason for termination was a financial loss the company had suffered and was not related to any issue of a proper fit between the parties.

In addition, the trial judge found the clause ambiguous as it did not state that he was specifically contracting out of his common law entitlement. The claim was determined based on common law entitlement.

The July 2011 decision of Justice Peter Glennie in Cybulski v Addeco determined that the clause by which common law entitlements are contracted out, must be drafted in a clear and unequivocal manner. The agreement in this instance read as follows:

“This contract is subject to provincial legislation regarding termination of employment. The first three months of this contract are considered to be a probationary period.”

Given the “at least” wording of the New Brunswick statute, the agreement was determined to fall below this standard and reasonable notice was allowed.

Potential Violation

It is to be noted that in the 1998 B.C. Court of Appeal decision in Shore v Ladner Downs, the issue which negated the employment contract was its potential, not actual, violation of the statute.

The same view of the potential violation as critical was made in an Ontario decision in 2011. The plaintiff successfully argued that the contractual term must be judged against the potential of the contract being offside. In this case, this included the potential of five years of employment to qualify for the severance sum: ⁹

It is pointed out by the defence that the termination provisions run afoul of the statutory minimums only contingently in that the termination of the plaintiff’s employment would have to be in circumstances in which a severance pay obligation was triggered under the Act for the minimums not to be met or exceeded. It is said that if the conditions in s. 64(1) of the Act were not present at the time of termination, the implementation of the agreement would not be non-compliant with the minimum standards under the Act.

[28] In my view, the language of the all inclusive clause, reproduced above at para. 15, evidences an intention to treat the payment of base pay under the termination provisions as the totality of the employee’s entitlements to compensation on termination regardless of whether the contractual provisions meet the statutory minimums or not. The agreement is to supplant the statutory obligations – whatever they might be – with the contractual ones. As some of the contractual provisions fall short of the statutory minimums, assuming no change in the applicability of severance pay, the agreement is in violation of s. 5(1) of the Act.

The same reasoning was followed by the Ontario Court of Appeal in a 2017 decision. The appellate court again saw the potential violation as the key: ¹⁰

The termination provisions contained in Articles 2.1(a) and 2.2 of the contract are contrary to ss. 54, 57 and 58 of the ESA in that they purport to allow the respondent to terminate, without cause, the employment of the appellant, in the event that she had been continuously employed for more than three months, by providing less than the statutory minimum notice period. In determining whether the contract is in compliance with the ESA, the terms must be construed as if the appellant had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void:

Testing the Potential Violation

A trial level decision in Ontario considered the "potential" argument on facts, which at trial, were seen to have required a lengthy period of future employment to put the termination clause offside. Given other reasons made by the trial judge, which were reversed on appeal, the trial court found that the termination clause was in potential violation of the ESA, which required continued employment to age 78, an event which would occur in 2035. The case was dealing with an employment relationship from 2008 to 2015. This was found at trial to have put the "potential" argument into the classification of "too remote".

The business of the plaintiff had been sold. The new employment contract ignored the plaintiff's past employment up to the date of the sale. The Court of Appeal concluded that this agreement could not contract out of the statutory requirement to count the entirety of the employment history. For this reason, the contract term was unenforceable and, more importantly, this issue of "too remote" was not reviewed on appeal. ¹¹

The comments made by the trial judge are a rare reflection of grading, so to speak, the extent of the potential of the violation.

The Ontario Court of Appeal considered an unusual termination clause in its June 2018 decision, referenced below on the saving clause issue. ¹²

The argument of the ESA violation was complicated. At the time of termination, the formula offered in the contract for termination compensation did not violate the Act. However, when the agreement was initially signed, it did show a potential violation of the ESA after 5 years of employment. This defect in the formula was then cured by the passing of time by the termination date.

This argument conceptually has validity. At the moment the agreement was signed, it was potentially offside. The fact that this was remedied by the passing of time may arguably not detract from that submission. The motions decision did not address directly this argument.

The motions judge, who had denied the summary judgment application of the defendant, had found that the termination clause did not violate the ESA, based on the saving clause. This particular argument was not raised by the plaintiff on the cross-appeal to the Court of Appeal.

The question will arise as to how far the "potential" argument will stretch. Should, for example, the employer have a modest work force which is far from the $2.5 million payroll threshold, must the contract contemplate severance pay? Where no benefits are provided, must the agreement call for benefits, if provided at some future date, be extended for the ESA period? Should the agreement contain a clause allowing for mass termination protections when the total number of employees is well south of the minimum requirement?

Arguably such a small company could be acquired by a larger entity and all these issues may be live. Must the contract contemplate such an event? This remains undecided.

The cases which have looked to the concept of a potential violation have each shown, save one, that it has been the passing of time that led to the potential of a violation of the statute, as opposed to a merger or other similar event. This may emerge as an important distinction. ¹³

An argument of such an expanded concept of the potential violation was made in the case below.

The clause in this August of 2020 decision did not include a term for the payment of severance pay. ¹⁴The plaintiff's years of service easily qualified but the payroll of the employer, which was a small dental office did not. The plaintiff had asserted that the offending clause was ambiguous. The clause read as follows:

Your employment may be terminated without cause for any reason upon the provision of notice equal to the minimum notice or pay in lieu of notice and any other benefits required to be paid under the terms of the Employment Standards Act, if any. By signing below, you agree that upon receipt of your entitlement under the Employment Standards Act, no further amount shall be due and payable to you, whether under the Employment Standards Act, any other statute or common law.

The court concluded that it should "not strain to create ambiguity where none exists". The clause above was considered by the court to show intended compliance with the statute:

When considering the wording of the clause in issue and the intent of the parties demonstrated in the wording of the clause, indicating compliance with the requirements of the ESA, I cannot conclude that the clause could or should be interpreted as contrary to or inconsistent with the provisions of the ESA. I do not find anything which would suggest that the termination clause should be interpreted as contrary to the ESA.

The decision did not deal head-on with the assertion made that the failure to address severance pay entitlement made the agreement unenforceable, but rather concluded the liability for this hypothetical sum was addressed in the agreement by the saving clause.

The same case also considered an argument that the benefits clause was also potentially in violation of the statute. The agreement called for benefits to be paid during the ESA notice period. The employer did not, in fact, provide benefits. The argument was made, unsuccessfully, that had benefits been provided, the statute required benefits be "continued" as opposed to paid. The same reasoning, as above, denied this submission. The agreement did fail for other reasons, making all of the above obiter.

This case is also considered below in the "saving" provision review.

Sole Discretion to Terminate at Any Time

The Ontario Superior Court considered a termination clause which contained a common term, one which allowed the employer the right to terminate employment "at any time" in its "sole discretion". These words were found also to be offside the ESA as this would run afoul of the protected right of reinstatement after a statutory leave and/or reprisal. ¹⁵ This issue is reviewed elsewhere.

A prior decision of the same court considered these same substantive words in 2020. ¹⁶ The agreement allowed the employer to terminate "without cause for any reason". The plaintiff made the same submission that these words ran afoul of the protections afforded by statute, citing 47 illustrations of such rights as set out in the Employment Standards Act, the Occupational Health & Safety Act and the Human Rights Code. ¹⁷ The submission failed.

The arguments in this immediate case were multiple. The plaintiff submitted that (1) there was no severance pay component, also noting that this was a small dental office; (2) benefits were said to be "paid" as opposed to being "continued", noting that there were no benefits; (3) there was no reference to vacation pay being paid for the ESA notice period; and (4) the submission as above on the words "for any reason".

These submissions were considered collectively in the reasons:

It is the position of the defendants that the termination clause should be read in context and as a reflection of the clear intent of the parties that the minimum requirements of the ESA apply. The defendants cite Oudin as a framework for the analysis of the enforcement of a termination clause.

[36] As stated in Amberber, the court should not strain to create ambiguity where none exists in the context of interpreting a termination clause. Further, as stated in Cook v. Hatch, a judge, in interpreting a termination clause, must look for the true intention of the parties, not to disaggregate the words looking for any ambiguity that can be used to set aside the agreement and, on that basis, apply notice as provided for by the common law.

[37] In my view, there is no inconsistency between the termination clause and the ESA provisions which could give rise to any ambiguity in the plaintiff’s right to continue to receive benefits pursuant to the ESA. When considering the wording of the clause in issue and the intent of the parties demonstrated in the wording of the clause, indicating compliance with the requirements of the ESA, I cannot conclude that the clause could or should be interpreted as contrary to or inconsistent with the provisions of the ESA. I do not find anything which would suggest that the termination clause should be interpreted as contrary to the ESA.

Comfort was found in the reasons in the apparent intent of the employer to comply with the statute. This is discussed in the "saving provision" review. To put this charitably, it is difficult to see the words in this case as leading to a fair conclusion that such a term should save the day, particularly in view of the words from the Court of Appeal on this very issue, which have stated a saving provision cannot cure an agreement which violates the ESA. The decision in this instance found in favour of enforcing this clause, as a saving term:

Your employment may be terminated without cause for any reason upon the provision of notice equal to the minimum notice or pay in lieu of notice and any other benefits required to be paid under the terms of the Employment Standards Act, if any. By signing below, you agree that upon receipt of your entitlement under the Employment Standards Act, no further amount shall be due and payable to you, whether under the Employment Standards Act, any other statute or common law.

All of the above was obiter, as the contract was found to be unenforceable for failing to address the distinctions of just cause under the ESA and common law.

Benefits

It is clear that an employment contract which does not allow for the status quo of benefits for the notice period will be offside the statute. As referenced above, this flaw cannot be cured by later voluntary compliance. ¹⁸

Further, the offending clause is not severable no matter what the contract may suggest to this effect.

It is clear that such a violation will cause the entire termination provision to be set aside. The offending clause is not severable no matter what the contract may suggest to this effect. ¹⁹

Low J. of the Ontario Superior Court reviewed a severance provision in the 2011 decision of Wright v The Young and Rubicam Group of Companies in which allowed for a formulaic severance payment. At the time of termination, the plaintiff had been employed for five years, a service period which required a contractual severance payment of 13 weeks’ base salary. This payment exceeded the statutory requirement of 10 weeks.

The company paid the sum in question and also provided 13 weeks of RRSP benefits, car allowance, parking allowance and continued all benefits for the same period, save disability and life insurances, which latter coverages were continued for the 8 week period of mandatory notice.

The termination clause was challenged by the plaintiff as its terms did not contemplate the continuation of benefits for the ESA week period. It read as follows:

This payment will be inclusive of all notice, statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.

The judge on the summary judgment motion concluded that the clause was offside the statute as it made no reference to the need to continue the benefits for the statutory period. She also stated that if the there was an ambiguity, it should be read against the employer.

The court also noted that the clause would have offended the statute at year after 8.5 years of service and after 9 years. The court went on to award a notice period of 12 months.

This reasoning was followed in Stevens v Sifton Properties again on the basis that the benefits were not referenced in the agreement.

An agreement which does allow for “salary” to be continued for the statutory period will not be interpreted to include benefits. This was the finding of Miller above and also of the Divisional Court: ²⁰

On the first point, I content myself with saying that the motion judge made no extricable error of law in interpreting the contract, and that his interpretation of the contract is free of palpable or overriding error. A palpable error is one that is obvious, plain to see or clear. On the contrary, the motion judge’s interpretation of the contract was an entirely reasonable one that was consistent with other cases. In particular, it was not a palpable error for the motion judge to conclude that the reference to salary in the termination clause of the agreement excluded other benefits.

The statute mandates that the status quo of group benefits be continued for the statutory period. It is the potential violation of the statute that determines the legality of a contracted term to the contrary, not the status as of the date of termination.

Such were the facts before the Ontario Court of Appeal in its 2019 decision. ²¹ The contract did contain a “saving provision” intended to insure that the minimum standards were met. It also stated that benefits would cease after 4 weeks following termination, which would put the contract offside the Act, after 5 years of service. At the time of termination, the plaintiff would have been entitled to 3 weeks of benefits. The document read as follows:

In accordance with the provisions of the Employment Standards Act (Ontario) or other applicable legislation, or on paying to the Employee the equivalent termination pay in lieu of such period of notice. The payments contemplated in this paragraph include all entitlement to either notice of pay in lieu of notice and severance pay under the Employment Standards Act Ontario. In the event the minimum statutory requirements as at the date of termination provide for any greater right or benefit than that provided in this agreement, such statutory requirements will replace the notice or payments in lieu of notice contemplated under this agreement. The Employee agrees to accept the notice or pay in lieu of notice as set out in this paragraph as full and final settlement of all amounts owing by the Employer on termination, including any payment in lieu of notice of termination, entitlement of the Employee under any applicable statute and any rights which the Employee may have at common law, and the Employee thereby waives any claim to any other payment or benefits from the Employer. Benefits shall cease 4 weeks from the written notice. [Emphasis added] ²²

The issues were whether the agreement was void, ab initio and secondly, if not, was it ambiguous. The Court of Appeal and the motion judge both saw the agreement as void, and in any event, ambiguous. The saving clause is reviewed below.

Standard of Just Cause to Avoid ESA

In June of 2022, the Ontario Court of Appeal considered the employment terms in its assessment as to whether the contract ran afoul of the Ontario statute. ²³ Prior to her employment commencing, the parties had executed two employment contracts. The first was an offer letter and the second was an “Officer Agreement”. The Offer Letter was to prevail in the event of any conflict between the two.

The Offer Letter stated that in the event of termination, in the absence of just cause, the company’s liability shall be limited to the greater of the notice set in the Officer’s Agreement or the minimum as in the Employment Standards Act.

There were two references to “just cause”, one in each document.

The Offer Letter stated as follows:

Cannon Design maintains the right to terminate your employment at any time and without notice or payment in lieu thereof, if you engage in conduct that constitutes just cause for summary dismissal.

The Officer Agreement states:

“if the Employee is terminated for cause, Paragraph 3(a) applies”.

Paragraph 3(a) provided that Ms. Rahman would receive one month’s notice.

The consequence of the provision that allows the Offer Letter to prevail, as noted above, leads to the interpretation that, in the event of termination for just cause, no notice or payment would be mandated.

The plaintiff was terminated without cause. She was paid 4 weeks severance.

In the litigation which followed, the plaintiff argued, unsuccessfully initially, that the termination terms were in violation of the statute. The argument made by the plaintiff was that the termination for cause provisions were offside the Act as the termination for just cause in the Act required a higher standard of just cause, wilful misconduct. ²⁴

The motions judge denied this submission as he had found that the plaintiff took independent legal advice, that she was a “woman of experience and sophistication” and, the parties’ subjective intention was to comply with the ESA minimum standards.

The subjective assessment of the plaintiff’s circumstances was determined to be an irrelevant factor, sufficient to show an extricable error of law when reviewed on the standard of correctness.

More acutely, the court noted that the employer could not exhibit model behaviour on termination by showing statutory compliance, where the agreement violated the statute:

It is the wording of a termination provision which determines whether it contravenes the ESA – even compliance with ESA obligations on termination does not have the effect of saving a termination provision that violates the ESA: Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, 134 O.R. (3d) 481, at paras. 43-44.

There was no term in the agreements which contemplated the event of “wilful misconduct”. Hence the termination clause was offside the statute. It mattered not that the plaintiff was not terminated for cause. Once it had been concluded that the termination clause contravened the statute, this boat was sinking:

This court has repeatedly held that if a termination provision in an employment contract violates the ESA – such as a “no notice if just cause” provision – all the termination provisions in the contract are invalid. See, for example, Waksdale v. Swegon North America Inc., 2020 ONCA 391, 446 D.L.R. (4th) 725, at para. 10, leave to appeal refused, [2020] S.C.C.A. No. 292; Rossman v. Canadian Solar Inc., 2019 ONCA 992, 444 D.L.R. (4th) 131, at para. 18. In Waksdale, as in the present appeal, the employer had not purported to terminate the employee for just cause. However, the just cause provision in the employment contract violated the ESA. The invalidity of the just cause provision rendered the other termination provisions unenforceable: Waksdale, at para. 10.

This issue was recently considered in a November 2022 decision. ²⁵ The contract in this instance stated as follows:

This Agreement may be terminated effective at any time for cause by OZ OPTICS without any notice or pay in lieu of notice, or severance pay, or payment to the Employee whatsoever, except payment of wages and vacation pay earned to the date of termination. Cause includes, but is not limited to, acts of theft, fraud, insubordination, conflict of interest and documented unsatisfactory performance, as well as any violation of Schedules “A”, “B”, and “C” to this Agreement.” (underlining added). ²⁶

The court concluded that this clause did not show compliance with the ESA just cause provision and hence the clause and the termination clause failed:

Moreover, the employment agreement in the present case provides: “Cause includes, but is not limited to, acts of theft, fraud, insubordination, conflict of interest and documented unsatisfactory performance, as well as any violation of schedules A,B&C to this agreement.” I observe that documented unsatisfactory performance will not normally amount to cause for summary dismissal. Insubordination may not amount to cause, depending on the circumstances, and “any violation of the schedules” to the employment agreement (e.g., the non-solicitation provisions) are unlikely to amount to cause. And a fortiori, they do not amount to wilful misconduct, disobedience or wilful neglect of duty. Undoubtedly, the employer’s termination for cause provision in this case purports to create a much broader exemption from the obligation to provide notice and severance pay than is permitted by the ESA.

To the same effect is are further decision from the same court in August of 2022 ²⁷ and August of 2023. ²⁸

For a review of a narrative description of the just cause standard under the ESA, there is popular quotation found in a 2017 decision ²⁹ which sets out the tests.

One Clause Offside, All Termination Clauses Fail

The Ontario Court of Appeal in June of 2020 reviewed an employment agreement which contained one term, as acknowledged by the employer, which violated the statute, dealing with termination for just cause. A second clause determined the severance payment due on termination, which was compliant with the statute. ³⁰

The motion judge had sided with the employer’s position and determined that the termination without cause paragraph was a stand-alone provision, unaffected by the violating term. The Court of Appeal, reversed, holding that the agreement must be read as a whole. The court also spoke to a strong policy in favour of a remedial interpretation:

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.

Severability Clause

The same case considered the impact of a clause which allowed the court to excise the offending clause from the contract. It read as follows:

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 Court of Appeal refused to bite on this argument. It would be improper, it concluded to use such a severability clause as such a term cannot revive that which has made void by statute:

We decline to apply this clause to termination provisions that purport to contract out of the provisions of the ESA. A severability clause cannot have any effect on clauses of a contract that have been made void by statute: North v. Metaswitch Networks Corporation, 2017 ONCA 790, 417 D.L.R. (4th) 429, at para. 44. Having concluded that the Termination for Cause provision and the Termination of Employment with Notice provision are to be understood together, the severability clause cannot apply to sever the offending portion of the termination provisions.

Saving Provision

The leading case on this issue is the 2019 decision of the Ontario Court of Appeal, Rossman, reviewed below. The case stated, as a policy matter, a saving clause should not be allowed to remedy a failure in the employment agreement to satisfy an employment standard.

The Ontario Court of Appeal did refer to such a saving term in its June 2018 decision, prior to Rossman. ³¹ Its statement was obiter as it found that the termination clause was in this instance enforceable. The Court’s comments should yet be noted. The words used in the contract were as follows:

In the event that the applicable provincial employment standard legislation provides you with superior entitlements upon termination of employment (“statutory entitlements”) than provided for in this offer of employment, IBM shall provide you with your statutory entitlements in substitution for your rights under this offer of employment.

The motions judge, who had denied the summary judgment application of the defendant, had found that the termination clause did not violate the ESA. She also found that that the above cited paragraph, which was referenced as the “failsafe” provision ensured that the ESA protections would be allowed.

The argument of the ESA violation was complicated. At the time of termination, the formula offered in the contract for termination compensation did not violate the Act. When the agreement was initially signed, it did, however, show a potential violation of the ESA after 5 years of employment. This defect in the formula had been cured by the passing of time by the termination date. This argument conceptually has validity. At the moment the agreement was signed, it was potentially offside. The fact that this was remedied by the passing of time may arguably not detract from that submission. The Court did not address this argument.

With respect to the first argument, the motion judge held that the termination clause did not violate the minimum requirements of the ESA. She held that the last sentence of the termination clause, which she termed the “failsafe” provision, ensures that a terminated employee receives what he or she is entitled to under the ESA. Accordingly, it cannot be said that the clause violates, or potentially violates, the ESA.

The Court took no objection to this clause. The employee had argued that this term was, in substance, a severability clause, which was to no effect:

In my view, the motion judge was correct in holding that the last sentence of the clause is effective to ensure that a terminated employee receives what he or she is entitled to under the ESA. As Iacobucci J. stated in Machtinger, at pp. 1004-05, employers can readily make contracts with employees which referentially incorporate the minimum notice requirements of employment standards legislation, or otherwise take into account later changes to such acts. That being the case, the clause as a whole does not violate the ESA.

[54] The sentence in issue here is not analogous to a severability clause. It does not purport to sever any part of the termination provision. Rather, it ensures that any portion of the termination clause that falls short of the ESA must be read up so that it complies with the ESA.

The entire clause read as follows:

TERMINATION OF EMPLOYMENT

If you are terminated by IBM other than for cause, IBM will provide you with notice or a separation payment in lieu of notice of termination equal to the greater of (a) one (1) month of your current annual base salary or (b) one week of your current annual base salary, for each completed six months worked from your IBM service reference date to a maximum of twelve (12) months of your annual base salary. This payment includes any and all termination notice pay, and severance payments you may be entitled to under provincial employment standards legislation and Common Law. Any separation payment will be subject to applicable statutory deductions. In addition, you will be entitled to benefit continuation for the minimum notice period under applicable provincial employment standard legislation. In the event that the applicable provincial employment standard legislation provides you with superior entitlements upon termination of employment (“statutory entitlements”) than provided for in this offer of employment, IBM shall provide you with your statutory entitlements in substitution for your rights under this offer of employment.

This statement was obiter as the Court of Appeal found that there was no ambiguity, contrary to the motions judge and that the contract was enforceable as written. The Court upheld the contract.

The Ontario Court of Appeal in an August 2019 decision, prior to Rossman, considered the following terms of the employment contract. ³² The contract in this instance read as follows:

Term of Employment

…The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Actor, at the Company’s sole discretion, either of the following:

a.Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period.

Payment in lieu of notice in the amount equivalent of two (2) months Base Salary. [Emphasis added.] ³³

The submission was made by the employer that these words captured the company’s contracted obligation to pay and provide the ESA minimum. That is, even if 4a or 4b applied, the ESA would remain guaranteed. ³⁴

The motions judge, as did the Court of Appeal, found that clause 4a and 4b violated the statute. The “saving” provision was determined to have been poorly worded and did not apply to these sections.

The 2019 Ontario Court of Appeal decision. ³⁵ set the apparent rule for the effectiveness of saving clause. As noted in the introduction to this review, the contract contained a “saving provision” intended to insure that the minimum standards were met. It also stipulated, however, that benefits would cease after 4 weeks following termination, which would put the contract offside the Act, after 5 years of service. At the time of termination, the plaintiff was entitled to 3 weeks of benefits. This term was then unenforceable as it revealed a potential violation of the ESA.

The issue was whether the saving provision would do just that and save the day. The document, in part, read as follows:

In the event the minimum statutory requirements as at the date of termination provide for any greater right or benefit than that provided in this agreement, such statutory requirements will replace the notice or payments in lieu of notice contemplated under this agreement.

…..Benefits shall cease 4 weeks from the written notice. [Emphasis added] ³⁶

The issues were whether the agreement was void ab initio, and secondly, if not, was it ambiguous. The Court of Appeal and the motion judge both saw the agreement as void, and in any event, ambiguous.

The appellate court also spoke to a policy issue in the construction of such agreements:

I make a final observation. Employees need to know the conditions, including entitlements, of their employment with certainty. This is especially so with respect to an employee’s termination – a fragile moment of stress and uncertainty.

[40] In this context, saving provisions in termination clauses cannot save employers who attempt to contract out of the ESA’s minimum standards. Holding otherwise creates the risk employers will slip sentences, like the four-week benefits clause, into employment contracts in the hope that employees will accept the terms. This outcome exploits vulnerable employees who hold unequal bargaining power in contract negotiations. Moreover, it flouts the purpose of the ESA – to protect employees and to ensure that employers treat them fairly upon termination: Machtinger, at pp. 1002-3.

[41] While employers are entitled to contractually amend the ESA’s notice requirements, as long as they respect the minimum standards, they are not entitled to offend them. Employers must have an incentive to comply with the ESA’s minimum notice requirements. They cannot be permitted to draft provisions that capitalize on the fact many employees are unaware of their legal rights and will often refrain from challenging notice provisions in court: Machtinger, at p. 1004. Attempting to reconcile the provisions of the Termination Clause with the benefit of hindsight runs counter to the remedial purpose of the ESA.

The value of such a saving provision seemed very doubtful, following this decision.

This being said, yet again a contrary theme followed in the reasoning of the Ontario Court in a 2024 decision. ³⁷ ³⁸ The plaintiff had been employed in the U.K. and upon his transfer to the Toronto office, he signed an agreement which set out his terms of employment which included a term that he would be bound by U.K. law and also that his rights under the minimum standards legislation would be protected.

The operative contract stated as follows:

For RBC initiated involuntary termination, notice of termination and severance entitlement, if any, will be based on RBC policies and practices in effect in the home country at the time notice of termination is given, unless superseded by host country laws.

The trial judge stated as follows on this issue:

Through the 2017 Agreement, RBC and Mr. Mittra plainly and unambiguously agreed that the mandatory provisions of the ESA would apply to Mr. Mittra’s employment while he worked in Toronto, notwithstanding any other provisions of the 2016 Agreement or the 2017 Agreement.

The agreement was found to be enforceable. Rossman was referenced in this decision but not on this point. From the decision, it appears that the invalidity of this term as a saving provision was not considered.

A 2020 decision also found that the words of the agreement reflected an intent to insure compliance with the statutory entitlements. ³⁹ The plaintiff had made several submissions which failed. ⁴⁰ These arguments included:

(1) The agreement did not address severance pay. The employer was a small dental office, far from a $2.5 million payroll.

(2) The agreement stated benefits would be "paid" as opposed to "continued" as required by the ESA. There were no benefits provided;

(3) The agreement did not require vacation pay for the ESA notice period.

(4) The agreement allowed for the right to terminate "without cause for any reason" which would, as submitted, contravene 47 statutorily protected rights under the Employment Standards Act, the Occupational Health and Safety Act and the Human Rights Code. ⁴¹

While the words "saving provision" were not specifically used, this is the substance of the decision, denying these submissions. ⁴² There are the words of the decision:

When considering the wording of the clause in issue and the intent of the parties demonstrated in the wording of the clause, indicating compliance with the requirements of the ESA, I cannot conclude that the clause could or should be interpreted as contrary to or inconsistent with the provisions of the ESA. I do not find anything which would suggest that the termination clause should be interpreted as contrary to the ESA.

It is difficult to reconcile the decision of the Court of Appeal in Rossman with this most recent decision above. Rossman was not referenced in the reasons.

Possible Legislative Revisions

This will be an important term should the legislature amend the minimum termination requirements. The termination terms of the Ontario statute have been in their present form for decades. It is not inconceivable, however, that these sections may be revised one day. This did happen recently with the Canada Labour Code, Individual Termination requirements.

The new law effective February 1, 2024 requires increased notice, or pay in lieu, to any employee with over 3 months of service. The notice period will be a minimum of one year per completed year of service to a cap of 8 weeks.

The precise sum is:

after 3 months:- 2 weeks;
after year 3: 3 weeks.

The pattern continues of one additional week per completed year up to 8 years and 8 weeks.

The present requirement is two weeks notice for any person with three months' employment.

An employee with one year or more is presently entitled to severance pay of 2 days per year of employment, plus a further 5 days. This remains in place.

It remains uncertain how an employer may address such concerns without a saving clause.

Summary

From these cases come these principles:

Clear wording must be used to eliminate the common law claim;

Attention should be paid to the differing standards of just cause;

All present components of compensation should be applied to determine the statutory entitlements;

A severability clause is of no utility;

There is a distinction between severance pay under the Ontario act and working notice;

The personal factors of the employee’s circumstance, such as a degree of sophistication and independent legal advice will be of no moment;

The employer cannot amend a flawed contract by doing that which the statute requires on termination;

The agreement will be read as whole. The drafts person missing a statutory obligation will put the entire termination clause at risk;

A saving clause is of no value; and

Courts will consider the apply the policy considerations as set out in the introduction above.

Employment Contracts