Case In Point
Court Distinguishes Waksdale in Case Where Employer and Employee had Equal Bargaining Power in Negotiating Contract
Date: September 16, 2021
In Rahman v Cannon Design Architecture Inc., a recent decision of the Ontario Superior Court of Justice, the Court distinguished the Ontario Court of Appeal’s landmark decision in Waksdale v Swegon North America, finding that on the facts of the case a provision which denied entitlements upon termination for just cause did not amount to an attempt to contract out of the Employment Standards Act, 2000 (ESA). This finding was based upon the employer and employee having equal bargaining power in negotiating the employment agreement in question and sharing a mutual intention not to contract out of the ESA. For this, and other reasons set out below, the Court found the termination provision to be valid and enforceable.
The Plaintiff’s Claim
The plaintiff commenced a wrongful dismissal claim against, among others, her former employer Defendant Cannon Design Architecture Inc. (Cannon Design).
Due to the business impact of COVID-19, in April 2020 Cannon Design, among other things, reduced the plaintiff’s base salary by 10%. The plaintiff’s employment was subsequently terminated without cause on April 30, 2020.
At the time of termination, the plaintiff was 61 years old, had four years and two months of service, and made $185,000/year plus benefits and participation in a discretionary bonus plan. The plaintiff’s employment was governed by the terms of an employment agreement, which the plaintiff had negotiated with the assistance of a lawyer before beginning work for Cannon Design.
The original employment offer presented to the plaintiff contained a termination clause that, in part, read as follows:
Cannon Design 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.
and
[In the event of termination without cause, Cannon Design will provide you with] advance notice and/or applicable payments, benefits continuation, and severance pay if applicable, equivalent to the minimum applicable entitlements contained within the Ontario Employment Standards Act, 2000, as amended, or any applicable successor legislation…[f]or greater certainty, Cannon Design’s maximum liability to you for common law notice, termination pay, benefits continuation, severance pay, or payment in lieu of notice shall be limited to the greater of the notice required in your Officer’s Agreement or the minimum amounts specified in the ESA.
The “Officer’s Agreement” (a general policy document affixed to the original employment offer) provided for, among other things, one month’s working notice of termination without cause.
Through negotiations, the parties agreed and entered into an employment agreement that contained the above “just cause” clause as well as a clause stipulating that if the plaintiff was terminated within the first five years of employment, she would receive two months’ notice conditional upon her executing a release in favour of Cannon Design.
The Court’s Decision
In a summary judgment motion before Justice Dunphy, the plaintiff argued that the termination provision in the executed employment agreement was void and unenforceable (thereby entitling her to common law reasonable notice), for five reasons:
- The “just cause” termination provision permitted termination without notice in circumstances beyond those permitted by the ESA,
- The negotiated termination provision only required her base salary to be continued over the notice period,
- The Officer’s Agreement was silent on severance,
- There were insufficient notice provisions in future, and,
- The employment contract stripped the plaintiff of her bonus entitlement even if it was fully earned.
Justice Dunphy rejected arguments #2 – #5 (inclusive) citing both the plain wording of the termination clause and the equal bargaining power between the parties at the time the final employment agreement was entered into. Justice Dunphy found that the employment agreement stipulated that ESA minimums would be paid in any and all events and that the plaintiff understood that fact by virtue of having received independent legal advice prior to entering into the contract.
With respect to argument #1 about the “just cause” portion of the clause, Justice Dunphy found that there was “no basis to apply a strict or even adverse construction approach” to the termination provision given the context of the case, including the following facts:
- The plaintiff received independent legal advice prior to negotiating and executing her employment agreement. The plaintiff’s legal advice dealt with the wording of the termination provision and pointed out the differences between the ESA minimum provisions and common law implied terms. The plaintiff’s lawyer did not take issue with the “just cause” portion of the termination provision at the time the parties were in negotiations over the agreement.
- The plaintiff’s negotiation of her employment agreement resulted in a material improvement in the termination provision from its original form (i.e. from ESA minimum entitlements to two months’ notice).
- The plaintiff and Cannon Design were both “reasonably sophisticated” parties who entered into the employment agreement freely and “in the absence of any particular disparity in bargaining power.” The plaintiff was being hired into a reasonably senior role at a significant salary and was “a woman of experience and sophistication.”
- The parties’ mutual intent to comply with the minimum standards of the ESA and a lack of evidence that the parties intended through use of the phrase “just cause for summary dismissal” to permit Cannon Design to terminate the plaintiff without notice or pay in lieu of notice for conduct falling below the ESA standard of wilful misconduct.
With respect to the parties’ mutual intent to comply with the ESA, Justice Dunphy stated:
[30] There is no basis for me to infer in this contract an intention to characterize non-wilful misconduct as amounting to “just cause for summary dismissal” and I cannot in fairness do so. If none of the parties to the contract at its inception – having turned their minds to the very subject of ESA minimum standards applicable on termination and their priority – took objection to the general “just cause for summary dismissal” language used it would be entirely illogical to infer nevertheless an intent to contract out of well-known and long-standing minimum standards in the jurisdiction in which they were operating. The language employed in no way requires such an illogical interpretation and there is no evidence of an existing non-conforming policy.
[31] The [employment agreement], properly and fairly construed in its true context, does not violate the minimum standards of the ESA in the case of “just cause for summary dismissal”. The ESA mandates no such result nor does a fair and reasonable construction of the agreement.
Justice Dunphy also found the termination clause at issue to be valid and enforceable because of sections 5(1) and 5(2) of the ESA. These sections generally state that any attempt to contract out of the ESAor waive an employment standard is void, unless the employee is being given a greater benefit than the employment standard via the contract. In the case before him, Justice Dunphy found that the termination provision gave the plaintiff a better benefit in the form of notice. This finding is a departure from the authorities which precede it.
Justice Dunphy made two notable comments regarding the interpretation of termination clauses that may have application beyond the facts of this case:
[28] The twice-repeated language of this contract quite explicitly follows the standard suggested by Machtinger and referentially incorporates the ESA minimum standards. It is not necessary to enumerate them exhaustively in the contract, particularly when they are subject to periodic change. Every contract – including this one – must be interpreted with a view to giving expression to the mutual intention of the parties as expressed in the words used by them. That intent is inferred from an examination of the surrounding circumstances. Conclusions reached in another case … are of limited assistance in construing the intention of these parties to this agreement in this context.
…
[36] If the contractual termination provisions are void, they must be void for all purposes and not merely at the election of one side or the other. Is a CEO with a rich and closely-negotiated severance package to be deprived of it because the employer can point to an alleged ambiguity in the “just cause” termination clause after the fact?
[37] Uncertainty in the application of the law to fairly negotiated employment agreements will only have the unintended consequence of causing employers to forego efforts to offer severance benefits beyond the ESA minima for fear that any steps beyond the limited bounds of the ESA will carry an unacceptable level of risk of being found invalid with the resulting potential for common law liability far in excess of what either side expected at the time the contract was agreed to. Doubtless this is already occurring to some degree. Over time, there are no winners in such a world.
Finally, and on a separate note, Justice Dunphy rejected the plaintiff’s argument that Cannon Design’s U.S. and Canadian parent companies were joint employers, finding that the mere existence of a multi-entity corporate structure in and of itself does not automatically dictate that a joint employer finding will follow.
The Takeaway
This decision is helpful to employers. If appealed, it remains to be seen how the Court of Appeal would address the various findings made.
The enforceability of any termination provision will depend on the specific wording of the provision and the context in which the employment contract in question was created. Employers should seek legal advice on their employment contracts, including termination provisions. They should retain in personnel files all communications leading up to the formation of any employment agreement. Depending on the facts of the particular case, employers may also continue to pursue the argument that a “just cause” provision does not represent an attempt to contract out of the ESA.
The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Hicks Morley Hamilton Stewart Storie LLP and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Hicks Morley Hamilton Stewart Storie LLP. ©
