Following the Ontario Court of Appeal's decision in Waksdale v Swegon North America Inc.(Waksdale), a decision we wrote about last June, Ontario's Superior Court has continued the judicial trend of troubling decisions for employers.
In Sewell v. Provincial Fruit Co. Limited, an employment agreement was determined to be unenforceable because, among other issues, the employment agreement purported to be terminable without notice or pay in lieu of notice for "just cause".
In 2018, Mr. Sewell commenced employment with Provincial Fruit Co. Limited ("Provincial Fruit") under the terms and conditions of a written employment agreement. The employment agreement contained the following relevant termination provisions:
b) Termination by the Company for Just Cause The Company is entitled to terminate your employment at any time and without any notice or any further compensation for just cause and the Company will not have any further obligations to you whether at contract, under statute, at common law or otherwise. c) Termination by the Company without Just Cause (A) The Company will be entitled to terminate your employment at any time without just cause by providing you with the following: […] (ii) a payment, or at the Company’s sole option, notice or combination of notice and pay in lieu of such notice representing termination pay and, if applicable, severance pay, as may be required under the Employment Standards Act, 2000, as amended from time to time (the “Separation Period”); […] It is agreed that upon compliance with the above provisions, the Company will be release (sic.) from any and all obligations to you, whether statutory, under contract, at common law or otherwise.
In April of 2019, Provincial Fruit terminated the employment of Mr. Sewell without cause. Consistent with the terms of his employment agreement, Provincial Fruit provided Mr. Sewell with his minimum termination entitlements required by Ontario's employment standards legislation.
Mr. Sewell brought a wrongful dismissal action against Provincial Fruit.
Ultimately, on a motion for summary judgment, Justice Mandhane agreed with Mr. Sewell and determined that termination provisions were unenforceable. Mr. Sewell was awarded damages in lieu of four months of reasonable notice.
In reaching his determination, Justice Mandhane found that the employment agreement violated Ontario's Employment Standards Act, 2000 ("ESA") for two reasons:
- a plain reading of the employment agreement supported Mr. Sewell's argument that it "combined notice and severance pay entitlements in violation of the ESA"; and
- the employment agreement, in its reference to "just cause", set a lower standard for a termination without notice or pay in lieu of notice than is permitted by the ESA.
Following the Ontario Court of Appeal's reasoning in Waksdale, Justice Mandhane found that, even though Mr. Sewell's employment was terminated on a "without cause" basis, the termination provision could not be enforced if any of its terms were unlawful.
In coming to this decision, Justice Mandhane also noted that the termination clauses had never been explained to Mr. Sewell and, more troublingly, that "it was reasonable for [Mr. Sewell] to sign the contract without parsing out the potential meaning of the termination provisions or seeking independent legal advice."
Impact & Action
The Sewell decision serves as yet another important reminder that employers must regularly and diligently review their employment contracts to ensure they are unambiguous, compliant with the ESA, and consistent with current case law.
Employers seeking to rely on termination provisions should also consider:
- using "plain language" in employment agreements to reduce claims that the employment agreement is not readily understandable;
- expressly highlighting, stressing or otherwise drawing a termination provision to the attention of the employee; and
- implementing appropriate methods to ensure that employees understand the terms and conditions of their employment agreement (e.g. by offering to reimburse employees for a sum to obtain independent legal advice).
It is worth noting that Justice Mandhane did not thoroughly explain why a reference to "just cause" in an employment agreement is automatically considered an attempt to contract out of the ESA. However, Justice Mandhane appears to have relied on a potentially troubling premise that "just cause" sets a lower standard than the standard set out in the ESA. These two standards are explained as follows:
- The "ESA Standard". Under the ESA, employees are entitled to receive notice or pay in lieu of notice of termination, unless they are exempt. One exemption, commonly referred to as the "misconduct" exemption, disentitles an employee to notice or pay in lieu of notice if the employee engages in “wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned" by the employer.
- The "Just Cause Standard". In contrast, at common law, “just cause” for termination without notice exists when an employee engages in misconduct that is irreconcilable or incompatible with continued employment. To determine the existence of just cause, an employer must examine the nature and extent of the employee's misconduct and the surrounding context. The employer must then determine whether a dismissal without notice (or pay in lieu of notice) is a reasonable and proportional punishment in the circumstances.
Ontario's Courts have, in the past, found that the ESA Standard is "higher" than the Just Cause Standard. In other words, an employee may engage in misconduct that could amount to "just cause" at common law, but that same misconduct would not amount to "wilful misconduct, disobedience, or wilful neglect of duty".
A close examination reveals that the ESA Standard is not necessarily or automatically a higher threshold than the Just Cause Standard. In fact, in many circumstances it would seem to be the opposite. For example, under the ESA Standard, provided that it was not trivial or condoned, an employee's single act of wilful misconduct would be enough to disentitle an employee to notice or pay in lieu of notice under the ESA (without the need for examination of context or proportionality as would be the case if applying the Just Cause Standard).
More troublingly, as has been demonstrated by modern case law, the difference between the ESA Standard and the Just Cause Standard tends to be wholly theoretical. In practice, to successfully sustain termination for "just cause" (commonly referred to as the "capital punishment" of the employment relationship), employers must meet or exceed the ESA Standard. As such, this theoretical distinction, though well-intentioned, has proven itself to be perplexing and, in modern times, illusionary.
We will continue to monitor this line of cases to see if the Supreme Court of Canada wades in to clarify the issues. For now, our clients should be reviewing their current contracts and considering whether changes are necessary. Should you have any questions or require assistance with your contracts, please reach out to a member of our Employment Group directly.