Court of Appeal Rules that “Cause” Existed to Invalidate Without Cause Termination Provision

In a recent decision, the Ontario Court of Appeal held that a “termination for cause” provision that violates the Ontario Employment Standards Act, 2000 (the “ESA”) will invalidate an otherwise enforceable and valid “termination without cause” provision of an employment agreement. A severability provision, which says that invalid provisions of an employment agreement can be severed from, and will not affect the valid provisions of the agreement will not save the offending termination clause.

This wrongful dismissal case involved an employee seeking 6 months’ pay in lieu of notice for his 8 months of employment with the employer. The employer relied on the “termination without cause” provision contained in the employment agreement to terminate the employee’s employment.

The employee argued that the employment agreement’s separate “termination for cause” provision violated the ESA and thereby rendered the entire employment agreement, including the otherwise valid “termination without cause” provision void and unenforceable. It is important to note that the ESA has a defined standard or threshold for “cause”. Accordingly, contractual provisions that provide for a different standard or threshold may be offside with the ESA.

The employer conceded that the “termination for cause” provision was unenforceable and breached the ESA but argued that it was irrelevant as the employer was relying on the “termination without cause” provision which was enforceable and the two clauses were discrete and severable. After all, the employee was dismissed without cause.

The issue before the Court of Appeal was whether the two clauses should be considered separately or whether the illegality of the “termination for cause” provision impacted the enforceability of the “termination without cause” provision.

Upon recognizing the power imbalance between employees and employers, the Court of Appeal concluded that it was irrelevant that the employer did not rely on the “termination for cause” provision when terminating the employee’s employment, as in its view, the correct approach is to determine whether the termination provisions in an employment agreement, read as whole, violate the ESA. In this case, it did.

The Court of Appeal further rejected the employer’s argument that the severability provision of the employment agreement severed the offending “termination for cause” provision.

The Court of Appeal did not comment on whether a “savings” clause (i.e. a clause stating that if any provision in the agreement violates the ESA, the ESA will apply”) if argued, could have led to a different conclusion. The Court of Appeal also did not specifically comment on or analyze the specific “cause” language in the contract as the parties to the litigation already agreed that the “cause” provision was unenforceable. Accordingly there was no commentary on what specific “cause” language may be found to be in compliance with the ESA.

Unfortunately, this decision by the Court of Appeal will impact many employment agreements as it questions the validity of termination clauses that were previously held to be valid.

We recommend employers have their employment agreements reviewed by our team to ensure that their contracts have enforceable language limiting liability at the time of dismissal.

If you have any questions about the way in which this decision will impact your employment agreements, please contact a member of our team.