Case In Point

Appellate Court Rules that Severability Clause Can’t Save a Partly Flawed ESA-Only Termination Clause

Case In Point

Appellate Court Rules that Severability Clause Can’t Save a Partly Flawed ESA-Only Termination Clause

Date: October 18, 2017

It is critical for all employers to ensure that they have a well-drafted and unambiguous termination clause which fully complies with the Employment Standards Act, 2000 (ESA), in order to survive judicial scrutiny.

The Ontario Court of Appeal has once again weighed in on termination provisions in employment agreements, this time noting that if any part of a termination clause is found to have breached the ESA, a severability clause within an employment agreement cannot be used to save the clause.

In North v Metaswitch Networks Corporation (North), the Court examined a termination clause in the employment contract of the appellant, whose earnings consisted of salary plus commissions. The termination provision intended to limit the appellant’s entitlements upon the termination of his employment without cause to the provisions of the ESA. It stated:

9.  Termination of Employment

(c) Without Cause – The Company may terminate your employment at any time in its sole discretion for any reason, without cause, upon by [sic] providing you with notice and severance, if applicable, in accordance with the provisions of the Ontario Employment Standards Act (the “Act”). In addition, the Company will     continue to pay it share all [sic] of your employee benefits, if any, and only for that period required by the Act.

The reference to notice in paragraphs 9(b) and (c) can, at the Company’s option, be satisfied by our provision to you of pay in lieu of such notice. The decision to provide actual notice or pay in lieu, or any combination thereof, shall be in the sole discretion of the Company. All pay in lieu of notice will be subject to all required tax withholdings and statutory deductions.

In the event of the termination of your employment, any payments owing to you shall be based on your Base Salary, as defined in the Agreement.

The appellant argued that the termination provision breached the ESA because the last paragraph expressly limited the payment of wages upon termination to be based upon his base salary only and excluded his commissions. The application judge agreed with the appellant, but held that the severability clause in the employment agreement could nevertheless save the remainder of the termination provision and the offending third paragraph of section 9 could simply be removed. That severability clause stated:

17.  General Provisions

(a) If any part of the Agreement is found to be illegal or otherwise unenforceable by any court of competent jurisdiction, that part shall be severed from this Agreement and the rest of the Agreement’s provisions shall remain in full force and effect.

On appeal, the Court held that “where a termination clause contracts out of one employment standard, the court is to find the entire termination clause to be void, in accordance with s. 5(1) of the ESA. It was an error in law to merely void the offending portion and leave the rest of the termination clause to be enforced.”

The Court noted that this decision may appear to be at odds with the decision of Oudin v Centre Francophone de Toronto (Oudin), which was relied on by the application judge in this case. The Court of Appeal in that decision upheld a decision by Justice Dunphy of the Ontario Superior Court, where he applied a severability clause to modify a termination provision rendering it compliant with the ESA. The rationale in Justice Dunphy’s decision was that he was simply enforcing the bargain that the parties had agreed upon. (For a discussion of Oudin, see our Case in Point Appellate Court Considers Intentions of Parties, Finds an ESA-Only Termination Clause Valid.)

The Court of Appeal in North, however, noted that the application judge did not have the benefit of this Court’s decision in Wood v. Fred Deeley Imports Ltd. (Wood) where the Court reviewed and summarized the principles and policy rationales underlying the Supreme Court of Canada’s landmark decision in Machtinger v. HOJ Industries. Specifically, the Court of Appeal in Wood emphasized the fact that contracting out of even one employment standard renders the entire termination clause void and it is an error of law to remove or amend the offending provision to make it ESA-compliant. (For a discussion of Wood, see our Case in Point Appellate Court Finds Termination Clause Unenforceable for Breach of ESA.)

The Court of Appeal in North noted that while Oudin focused squarely on the bargain of the parties, the decisions in Wood and now North give significant deference to the following principles:

  • employment contracts are different from commercial and other forms of contracts and as such, they must be treated differently. This is based on the premise that there is an inequality of bargaining power between the employer and the employee at the time of formation;
  • termination clauses which breach the ESA should be declared void to encourage employers to draft agreements that comply with the ESA, rather than having courts interpreting offending clauses in a manner that conforms to the ESA; and
  • faced with a termination clause that could reasonably be interpreted in more than way, courts should prefer the interpretation that gives the greater benefit to the employee.

The Court of Appeal has sent a strong message to employers that if they want to limit an employee’s entitlements upon termination to the ESA, every part of the termination provision must comply with the ESA or the clause will be struck down and reasonable notice will be awarded. A severability clause will not prevent a court from finding otherwise.