Canada: Courts Will Not Sever Defective Termination Provisions

"It is an error in law to merely void the offending portion and leave the rest of the termination clause to be enforced."

North v Metaswitch Networks Corporation, 2017 ONCA 790 [Metaswitch] is the latest in a series of employee-friendly appellate level decisions where a contractual termination provision is not enforced. The Ontario Court of Appeal followed its previous decision in Wood v Fred Deeley Imports Ltd., 2017 ONCA 158 [Fred Deeley] to hold that a termination provision is void if any aspect of it contravenes the Employment Standards Act, 2000 (ESA). The Court rejected the employer's argument that a severability provision could remove a non-compliant part of the termination provision and, by preserving the remainder, limit the employee's entitlements to the minimum amounts under the ESA.

Application Decision

After being terminated without cause, the employee alleged wrongful dismissal. The employee's wages were comprised of both salary and commissions. Under the employment agreement, commissions were expressly excluded from the employee's entitlements upon termination.

The employee argued that the termination provision effectively reduced his wages (as defined in the ESA) during the notice period. For this reason, it contravened the ESA. In response, the employer argued that, if the termination provision was illegal for excluding commissions, a severability provision in the contract kept the other, ESA-compliant parts in force.

The application judge held that the severability provision could remove the unenforceable part of the termination provision. This left the rest of the termination provision intact and revived its enforceability (i.e., rebutting the common law notice period and limiting the employee to the minimum amounts under the ESA).

Appeal Decision

A unanimous Court of Appeal overturned the application judge's decision. The Court noted that employment contracts are not ordinary commercial agreements. As such, they require special interpretive considerations.

Citing its earlier decision in Fred Deeley, the Court recognized that termination provision enforceability has three components: (i) the wording of the provision; (ii) compliance with the ESA; and, (iii) jurisprudence on interpreting employment agreements. Other considerations may include: the inequality of bargaining power between employee and employer, the employee's unfamiliarity with the ESA, extending the scope of the ESA, deterring the employer from its contravention, providing the employee with termination entitlement certainty, and preference for employee-friendly contractual interpretation.

With these factors in mind, it was held:

... 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 is an error in law to merely void the offending portion and leave the rest of the termination clause to be enforced (at para 24).

The Court then articulated the correct approach for applying severability in the context of termination provisions:

... first assess the termination clause to see whether there is any contracting out of an employment standard. If there is, then the termination clause is void, and there is nothing to which the severability clause can be applied. In that way, the severability clause is not void, but is inoperative where the agreement contracts out of or waives an employment standard (at para 42). [Emphasis added]

The Court further noted that:

... this conclusion does not make the severability clause void. It continues to have application to the rest of the agreement. However, it cannot have any effect on clauses of the contract that have been made void by statute. Those terms are null and void for all purposes and cannot be rewritten, read down or interpreted through the application of a severability clause to provide for the minimum standard imposed by the ESA (at para 44).

In summary, even if a severability provision exists, it will not apply to a termination provision to remove any non-ESA compliant parts. Consequently, any part of a termination provision that contravenes the ESA will render the entire provision void (even if it is ESA-compliant in every other regard).

Key Takeaways

1. Draft Clearly Worded, Enforceable Termination Provisions

As we have previously written, it is essential to draft clear and enforceable terminations that fully comply with the ESA. This is particularly so when termination provisions are being litigated with greater frequency.1 In Fred Deeley, it was held that an actual or potential contravention of the ESA is sufficient to render termination provisions unenforceable. Accordingly, entitlements to notice pay or pay in lieu of notice, severance pay, vacation pay and benefit continuance should be clearly accounted for and, if necessary, particularized.

2. Do Not Be Overly Reliant on Severability Provisions

Ideally, severability provisions are unnecessary shields against future unenforceability issues. Indeed, Metaswitch confirms that severability cannot be used to preserve a termination provision that contravenes the ESA in any respect.

Potential ambiguities should be anticipated and thought through at the time the employment agreement is drafted and, if necessary, specifically considered within its terms.

3. Consider Using a Saving Provision

"Saving provisions" provide that, in all circumstances, employees will not receive less than their minimum statutory entitlements. While no such provision existed in Metaswitch, it may have supported an ESA-compliant interpretation of the employment agreement. The bedrock of contractual interpretation is the intention of contracting parties. It is generally recommended that employers using restrictive or exclusionary language include a saving provision so that intended compliance with the ESA is not in doubt.

Footnotes

1 See, for example: Covenoho v. Pendylum Ltd., 2017 ONCA 284; Cook v Hatch Ltd., 2017 ONSC 47; Oudin v Le Centre Francophone de Toronto, 2015 ONSC 6494.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Joseph Blinick
Carl Cunningham
 
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