Groves v. UTS Consultants Inc., 2019 ONSC 5605

In its recent summary judgment decision in Groves v. UTS Consultants Inc., 2019 ONSC 5605 (Groves), the Ontario Superior Court of Justice held that a termination clause, which was found to contract out of the Ontario Employment Standards Act, 2000 (the ESA) due to the exclusion of past service, could not be read to comply with the ESA despite containing a "saving clause". Previous jurisprudence, including that from the Ontario Court of Appeal, has found that saving language can modify a termination provision to ensure that it complies with the ESA, but the Groves decision suggests that employers cannot rely on such saving clauses as a failsafe protection against a finding of unenforceability.

Facts 

The plaintiff, Wayne Groves, founded UTS in 1992 and served as its President. In 2014, Oakville Enterprise Corporation (OEC) acquired all of the shares of UTS pursuant to a share purchase agreement (the SPA) between OEC, the plaintiff, and his spouse, Julie Groves. In connection with the sale of UTS, the plaintiff also signed a resignation stating that he resigned as an officer and director of UTS, effective immediately. On the same date that the plaintiff signed the SPA, he also entered into an employment agreement with UTS (the Agreement) and then continued in his role as President. The Agreement contained the following termination provision:

"This agreement may be terminated in the following manner in the specified circumstances:

b) By the Company at any time for cause without notice or pay in lieu;

c) By the Company at any time without cause provided that the Company provides you with notice in writing or pay in lieu of notice (as salary continuation) or some combination thereof equal to four (4) weeks base salary for each year of service that you have with the Company calculated from the date of this letter (and, for greater certainty, excluding any period of service you had with the Company prior to the date of this letter) with a guaranteed minimum notice or pay in lieu of notice equal to three (3) months base salary; provided that the maximum notice period or pay in lieu of notice that you will receive shall in no circumstances exceed twelve (12) months. Notwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the Employment Standard Act (Ontario). In addition, the severance package will also include continuation of medical and dental benefits during the severance period. Any variable pay owing to you will be prorated for the year's service and paid at the time of termination. For greater certainty, you agree that for purposes of calculating any entitlement which you may have arising from the termination, without cause, of your employment with the Company, any prior service with the Company is excluded and you hereby waive and release any prior service entitlements."

UTS terminated the plaintiff's employment without cause on September 26, 2017 and, in exchange for a release, offered him salary and benefits continuance for 13 weeks, as well as variable pay for the calendar year for 2017 pro-rated for the period up to three weeks after the date of termination. The plaintiff did not accept the offer or sign the release and brought this action against UTS, challenging the termination provision on the bases that it i) purported to waive termination pay and severance pay entitlements under the ESA; ii) provided for termination pay and severance pay to be determined based on "base pay" only; iii) permitted termination without notice for just cause, as opposed to the ESA standard of wilful misconduct; and iv) had no provision for severance pay if pay in lieu of notice was provided.

Decision 

The Court found that the termination provision was in contravention of section 9(1) of the ESA, which deems employment to be continuous not withstanding sale of the employer. The termination provision stated that "any prior service is excluded and you hereby waive and release any prior service entitlements," for the purpose of calculating any entitlement arising from a termination without cause, which is clearly contrary to section 9(1).

The Court also found that the resignation that the plaintiff had signed had no effect on this analysis as it had been a resignation from the position of officer and director only and UTS had not provided clear and unequivocal evidence that the plaintiff resigned. In any event, the Court also found that irrespective of any resignation, since the termination provision did not base severance pay on the entirety of the plaintiff's service, it did not comply with section 65(2) of the ESA, which requires non-continuous service to be included when calculating severance pay.

Although the Court had already found the termination provision unenforceable, it went on to comment that another issue with the termination provision was that it stated that pay in lieu of notice would be calculated using "base salary" only, not including variable pay, pension contributions, and consequently contravening the requirement in section 60 of the ESA - that an employer not reduce wages or alter any other term or condition during the notice period.

Having found that the termination provision was unenforceable on the aforementioned bases, the Court noted that it did not need to consider whether the ability to terminate for cause without notice or pay in lieu of notice also violated the ESA or whether the termination provision breached the ESA because it allowed for the payment of the termination entitlement as salary continuation.

The Court then proceeded to consider the saving clause, which stated, "[n]otwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the ESA". The Court found that the saving clause was of no assistance in rendering the termination provision enforceable and remarked that:

"[w]hen the employer has sought to contract out of the ESA, a saving provision cannot be used to rewrite the express language in an agreement to cause it to comply…The Termination Provision cannot be interpreted to comply with the ESA because, contrary to s. 9(1), it specifically precludes an interpretation that would include Mr. Groves' prior service with UTS. As a result, the saving clause does not assist and the Termination Provision cannot be read up in order to bring it into compliance with the ESA." (para. 62)

Since the termination provision was found unenforceable, the plaintiff was awarded a reasonable notice period of 24 months.

Takeaway 

The decision in Groves suggests that saving clauses may not always assist employers in rendering a termination provision enforceable that otherwise falls short of or runs contrary to ESA termination entitlements. It remains to be seen how the Groves decision will be interpreted in future cases and particularly how it will be treated by higher courts.

Groves may be read narrowly to find that the saving clause did not render the provision enforceable in this case because the employer's clear intent was to discount the plaintiff's past service, which was in contravention of the ESA. It is arguable that the situation in Groves is different from one where the surrounding circumstances suggest that the employer intends to comply with the ESA, but a drafting technicality results in it being possible to read the provision as contravening the ESA, and that a saving provision may still produce an enforceable termination provision in such a context. As we await further jurisprudential treatment of Groves, however, employers should ensure that termination provisions in their employment agreements are drafted to be ESA compliant in and of themselves, without the need for a saving clause, even if saving language is included as a further precaution.