July 6, 2020

Employment Contracts: A Moving Target

Employers regulated by Ontario law have the right to terminate an employment relationship at any time, for reasons that are not discriminatory, by providing notice of termination, or pay in lieu of notice, and any statutory severance pay.  

How much notice must be given can be difficult to determine.  Our advice to employers follows a three step process:

  1. Determining the reason for termination.  If misconduct is the reason, the employer may not be required to provide any notice or severance.
  2. Determining statutory minimums.  If there is no or insufficient misconduct, we establish the minimum notice and severance that may be required under the Employment Standards Act, 2000 (“ESA”); 
  3. Determining common law requirements.  At this stage, we examine whether or not additional severance pay is required, beyond the minimum ESA requirements, in accordance with judge-made “common law”.  

The third step requires an assessment of the employment contract between the parties.  It may limit the employer’s obligations to the ESA minimums and avoid the need to comply with the common law.  

Thus, the employment contract is the only way to minimize the employer’s obligations at the time of terminating employment.  It is still one of the best legal examples of the adage, ‘an ounce of prevention is worth a pound of cure’.   

The contract will only work, however, if it is properly drafted.  Numerous cases from our courts in recent years demonstrate that what was previously a properly drafted contract is now invalid.    

In this Upshot, we explain how a contract of employment may be successfully challenged by an employee so that an employer may have to comply with common law requirements, which can dwarf ESA requirements.   

The Employer’s obligation to Provide Notice and Severance

(a)   Statutory Requirements

The ESA establishes minimum obligations in relation to notice of termination and severance pay.  Notice ranges from 1 week to 8 weeks.  If the employee has 5 or more years of service and the Employer’s total payroll is over $2.5 million, then severance is also payable, equivalent to 1 week per year of service. Hence, an employee dismissed after 8 years of service may be entitled, at a minimum, to 8 weeks’ notice and 8 weeks’ severance pay.  

The ESA requirements for termination and severance pay are exempted if the dismissed employee engaged in conduct that amounted to wilful misconduct, disobedience or neglect of duty.  Theft of employer property is one example of wilful misconduct that may exempt the employer from paying termination and severance pay. 

(b)  Common Law (Reasonable Notice) Requirements

In many cases, the statutory requirements of the ESA are not the end of the story.  Employees without a written contract of employment are entitled to reasonable notice of termination.  As any employer previously sued for wrongful dismissal will know, what constitutes reasonable notice can be maddingly difficult to determine.  Sometimes, 2 weeks per year of service is reasonable.  Other times, 4 weeks per year is appropriate.  In some cases, like senior executives with short service, the notice period is disproportionately high in relation to service, greatly exceeding 4 weeks per year of service.

The exception to reasonable notice is just cause.  Just cause, while analogous in its effect to ‘wilful misconduct, disobedience and neglect of duty’ under the ESA, is a slightly lesser standard.  Thus, misconduct that may constitute just cause and exempt the obligation to provide reasonable notice, may not constitute wilful misconduct, disobedience and neglect of duty under the ESA.  

The Contractual Solution

The uncertainty associated with reasonable notice entitlements provides the seeds for chaos. Demands from the employee’s lawyer, opinions and teleconferences with the Company’s lawyer and potentially, litigation.  It all adds up to distraction and unanticipated cost.   

Properly written, an employment agreement can specify a predefined notice period, no less than the ESA minimums for termination and severance pay.  The agreement can limit the employer’s obligation to no more than the ESA minimums.  

What ‘properly written’ means in recent years has become a loaded question.

Since at least 2012, there have been a raft of cases in the courts challenging termination provisions in employment contracts.  Many of the challenges have been successful for a variety of reasons.  In some cases, the termination provision in the contract inadvertently promises less than the requirements of the ESA.  For instance, the contract may fail to specify that an employee will receive benefits throughout the minimum notice period.   

In a recent decision from the Ontario Court of Appeal, an employee argued that ‘just cause’ language in a contract demonstrated an intent to deny the employee his minimum ESA right to notice of termination.   The Court of Appeal agreed with the employee and sent the case back to the lower court to determine the employee’s reasonable notice period. 

The Court’s Decision

In Waksdale v. Swegon North America Inc. the plaintiff employee was dismissed after only 9 months of employment.  The contract he entered at the start of the relationship stipulated that he would only receive his minimum entitlement under the ESA )1 week) upon termination without cause. If he was terminated “for cause” he would receive nothing.  

Mr. Waksdale was not dismissed for cause, but successfully argued that the termination provision limiting his entitlement to the ESA was void.  The reason he succeeded is because the employment contract he signed permitted the employer to dismiss him without the ESA minimums in the event that his conduct in the workplace met the common law standard of  just cause, which, as noted, is a lower standard than the ESA standard of wilful misconduct, disobedience or neglect of duty.   

In other words, the contract of employment purported to deny Mr. Waksdale his minimum statutory entitlement according to a standard that is less stringent than what the legislation expects.  That the employer complied with its minimum obligations, and what the contract entitled Mr. Waksalde to receive upon termination, was irrelevant.  The contract was void from the outset.  

The Upshot

Many contracts written prior to the Waksdale case purport, inadvertently, to exempt the employer from complying with ESA termination obligations based on the higher common law standard of just cause.  These termination provisions are void and may be challenged by employees.  

We recommend that employers do the following, to protect against costly and distracting employment terminations:

  1. Have your contracts reviewed for ESA compliance and potentially ambiguity in drafting;
  2. If your contract offends the ESA, immediately discontinue use;
  3. Ensure that the contract is revised to current standards and that new employees are hired using your amended contract.  

Employers should take care not to introduce new contracts for existing employees.  While certainly possible, existing employees will require “fresh consideration” from the employer for the new contract to be binding.  Stay tuned for another Upshot where we address the issue.