Significance of bargaining power in employment law

Facts
Decision
Comment

In Rahman v Cannon Design Architecture Inc,(1) the employer dismissed the plaintiff, a four-year employee, without cause. The plaintiff brought a summary judgment motion for wrongful dismissal. The issues before the Ontario Superior Court of Justice were whether the termination provisions of the employment agreement were valid and enforceable.

Facts

The plaintiff in this case was hired on 16 February 2016, according to a written employment contract. The employment contract comprised of two parts:

• an offer letter; and
• a general "officer's agreement", which set out additional terms and conditions of employment.

The officer's agreement was more of a general policy document, while the offer letter was created specifically for the plaintiff. The offer letter was clear that in case of conflict between the two documents, the offer letter would govern.

The offer letter provided that the employer's liability to the plaintiff for notice, termination pay, and severance pay would be limited to the greater of the notice required in the officer's agreement or the minimum amounts specified in the Employment Standards Act 2000 (the Act). The officer's agreement provided that after five years of service, the plaintiff would receive one month's working notice with an enhanced notice period in the event of termination. Further, the offer letter contained a "saving provision", which clearly stated that in the event of termination of employment, the plaintiff would in no circumstance receive less than her entitlements under the Act.

The employer provided time for, and even encouraged, the plaintiff to seek independent legal advice. The plaintiff agreed and obtained legal advice regarding the termination provisions in the offer letter. The legal advice obtained by the plaintiff dealt specifically with the termination provisions in the offer letter and the officer's agreement. The plaintiff's legal counsel explained the significance of the termination provisions to her, and ultimately provided alternative language for her to suggest to her employer. The alternative language provided for one month of notice per year of service in exchange for the plaintiff's signature on a full and final release.

The employer did not agree entirely to the alternative language suggested by the plaintiff but did agree to change the terms of the termination provision in the offer letter in the plaintiff's favour. The plaintiff would now receive two months' notice if her employment was terminated within the first five years of employment. This benefit was a material improvement to the employment contract and greater than the minimum termination entitlements set out in the Act. The parties were content with the language negotiated and signed off on the employment contract.

The plaintiff's employment was later terminated without cause on 30 April 2020.

Validity of termination privisions
The termination language in the offer letter stated:

[the Employer] 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.

Following her termination of employment, the plaintiff brought a wrongful dismissal action against the employer. In a motion for summary judgement, wherein she argued that the termination provisions in the employment agreement were void for violating the minimum standards set out in the Act, the alleged violations were:

• a "just cause" termination provision that permitted termination without notice in circumstances beyond those permitted under the Act;
• the notice provisions purported to pay base salary only during the notice period;
• lack of severance pay in the officer's agreement;
• insufficient notice provisions in future; and
• stripping bonus entitlements even if fully earned.

The plaintiff relied on Ojo v Crystal Claire Cosmetics Inc,(2) to argue that the phrase "conduct that constitutes just cause for summary dismissal" was determined to be an invalid attempt to contract out of the Act. Further, the plaintiff relied on Waksdale v Swegon North America Inc (Waksdale),(3)(4) in alleging the termination provision of the agreement was entirely unenforceable since the "just cause" provision would permit termination without notice and more broadly than the Act permitted.

Decision

The Court dismissed the plaintiff's summary judgment motion and found that she was bound by the employment agreement's clear and unambiguous terms. The Court rejected the plaintiff's arguments in stating that a phrase cannot be held to contravene the Act in every case, especially in the present case where the termination provisions were negotiated and improved. The Court found that the contract expressed the mutual intention of the parties – the employment contract also repeated reference to the Act minimum standards so that there was no reason to conclude either party intended a standard below the Act.

Additionally, the Court ruled that the termination provision must be upheld because the employer provided a benefit in excess of the minimum standards set out in the Act. The Court found that according to section 5(2) of the Act, a provision that provides a greater benefit than a standard shall apply over the applicable minimum standard. On this basis, the Court found that the termination provision in the offer letter was valid and governed the plaintiff's termination.

The Court's decision in Rahman is a significant in that it rejects the now-common claim, based on the Court of Appeal's decision in Waksdale, that any termination provision that allows termination of employment for "just cause" violates the Act and, therefore, entitles the employee to common law reasonable notice.

In Waksdale, the Ontario Court of Appeal held that if any part of the termination clause violated the Act, the entire termination section was unenforceable. This was despite a severability clause which set out that unenforceable terms and provisions would be severed, allowing the remaining terms and provisions to survive in full force.

The Rahman decision distinguished Waksdale in circumstances where it was determined that there was no imbalance of bargaining power as both parties were said to be reasonably sophisticated, with neither being compelled to agree to any part of the employment contract by force. The parties negotiated terms and had the benefit of independent legal advice, which led to material changes and improvements to the employment contract.

Unless Rahman is successfully appealed, it will give some confidence to employers that where two sophisticated parties negotiate and come to an agreement in an employment contract that reflects their mutual intentions and understanding, a court will be more likely to enforce the parties' agreement as written.

Comment

A key takeaway from these cases is the value for employers of documenting any negotiation process that goes into the drafting of the terms in an employment agreement so that they can illustrate the bargaining dynamics giving rise to employment contract terms. While such negotiation may not apply in all cases where new employees are hired, prospective employees should generally be encouraged to obtain independent legal advice prior to finalising and agreeing to the terms of an employment contract to indicate they understand its contents. Employers must continue to ensure that the terms and provisions of their employment contracts comply with the minimum standards set out by the Act. Although the Rahman decision may be appealed, for now employers can be assured that the logic used by the court to invalidate employment contract termination provisions in Waksdale will not necessarily apply to all situations and contracts according to the decision in Rahman.

For further information on this topic please contact Lisa Cabel or Qasid Iqbal at KPMG Law by telephone (+1 416 777 8000​) or email ([email protected] or [email protected]). The KPMG Law website can be accessed at www.kpmg.com.

Endnotes