Termination “For Cause” Provisions Can Invalidate all Termination Provisions Found in an Employment Contract

One thing that all business owners should do is ensure that they have well-drafted employment contracts that clearly set out the terms of employment that exist between them and each of their employees. As employment litigation lawyers, we recommend that our clients who are employers include provisions in their employment contracts that explain what their employees will be entitled to upon the termination of their employment. In employment litigation law, the traditional rule under the common law, which is the law created by judges, is that if an employee is terminated for cause (sometimes referred to as “just cause” or for a reason), the employer does not need to provide that employee with notice of their termination, or payment in lieu of such notice. Conversely, if an employee is terminated without cause (or without a reason), the employer will be required to provide that employee with reasonable notice of their termination, or payment equal to all wages and benefits that the employee would have been entitled to receive if they continued working through the reasonable notice period.

Common Law Notice

Determining what amount of notice is “reasonable”, under the common law, involves the consideration of a number of factors such as the employee’s age, length of service, character of employment, availability of similar employment having regard to the employee’s experience, training and qualifications. There is no precise mathematical formula that can be used to calculate what a reasonable amount of notice will be. Reasonable notice is most commonly found to be somewhere between three and six weeks for each year that the employee has worked for the employer. Wrongful dismissal lawyers become skilled, through experience, at estimating what a reasonable notice period will be in specific circumstances.

Statutory Notice

Under Ontario’s Employment Standards Act (the “ESA”), most employees are only entitled to one week of notice upon termination for each year that they were employed, up to a maximum of eight weeks of notice. As such, it is advisable for employers to include provisions in their employment agreements that specify that employees who are terminated without cause are limited to receive the minimum entitlements provided for by the ESA, and are not entitled to common law notice. Absent such a clause, employers can be liable for providing much higher amounts of notice to terminated employees than what they are required to provide under the ESA.

“For Cause” vs. Willful Misconduct

As recent court cases in Ontario have illustrated, the ESA has a higher standard than “for cause” or “with just cause” to disentitle a terminated employee from the right to receive notice. Under the ESA, only employees who are guilty of willful misconduct, disobedience or willful neglect of duty may be terminated without being provided notice. The main difference here is that common law cause for dismissal may include prolonged incompetence or other unintentional misconduct, while the ESA’s willful misconduct standard involves employees who act with intent or are “being bad on purpose.” Employers must be very careful when drafting the termination clauses in their employment agreements, as termination provisions that do not provide for the minimum entitlements required by the ESA will be deemed unenforceable by the courts.

All Parts of Termination Clauses Must Comply With the ESA

In 2020, the Court of Appeal for Ontario issued a decision in Waksdale v. Swegon North America Inc. (“Waksdale”), in which it held that a termination for just cause provision that did not comply with the ESA invalidated the entire termination clause in the employment agreement, even though the employee in question was terminated without cause and the employment agreement’s termination without cause provision did comply with the ESA. As the entire termination clause was deemed unenforceable, the employer in Waksdale was required to provide the employee with common law notice, rather than ESA notice. The result of this case was surprising to many workplace lawsuit lawyers.

Since Waksdale, the Ontario Superior Court has released two decisions, Sewell v. Provincial Fruit Co. Limited (“Sewell”) and Lamontagne v. J L Richards & Associates Limited (“Lamontagne”), in which it held that termination clauses were invalid because they did not meet the ESA’s willful misconduct standard for terminating employees without notice. In Sewell, the employment agreement stated that employees provided for “just cause” were not entitled to any notice or further compensation, while in Lamontagne, the employment agreement provided that “employment may be terminated for cause at any time, without notice.” In both cases, the Court held that the termination provisions were unenforceable because they allowed for employees to be terminated without notice, based on the common law “cause” standard, rather than the ESA’s more stringent standard. This was despite the fact that the employees in both cases were terminated without cause and the employers were not seeking to rely on the “for cause” or “for just cause” sections of the employment agreements.

Takeaways

As, up until now, it had been very common for employment agreements to include termination clauses with separate provisions for “without cause termination” and “termination for cause”, a great deal of employment contracts in Ontario may no longer be valid. At this point of writing, neither Sewell nor Lamontagne have been reviewed by an appeals court, and it is not yet clear whether either case has been or will be appealed. It is possible that other Judges of the Ontario Superior Court could interpret this issue differently, since they are only bound to follow the precedent of higher courts. For now, employers should specify in their employment agreements that only employees guilty of willful misconduct may be terminated without notice. Otherwise, they run the risk of having the termination clauses in their employment agreements being deemed unenforceable. Our employer lawsuit lawyers are happy to advise clients on how to properly draft termination clauses in employment agreements that comply with the ESA and will be enforceable.

Tags: Civil Litigation Law, Contract Dispute, Court of Appeal, Commercial Litigation Law, Employment Litigation  Law

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