Canada: The Ontario Court Of Appeal Weighs In On The Severability Of Termination Clauses

In a recent decision, North v Metaswitch Networks Corporation, the Ontario Court of Appeal found that the employer could not rely on a severability clause in an employment contract to delete only one part of a termination provision for being less than the employment standard minimum. The Court found that the entire clause must be severed from the contract.

The employer had terminated North's employment without cause. He was entitled to base salary plus commissions under his employment contract. The employment contract provided:

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 its 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.

It also contained a severability clause which stated:

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.

North took the position that the termination provision was void and unenforceable pursuant to s.5(1) of the ESA, because it provides that his termination pay is to be based on "Base Salary" and excluded his commissions. The employer relied on the severability clause to excise only the last sentence, which it conceded was unenforceable, and argued that the balance of the termination clause should remain in effect, limiting North to the minimum entitlements under the ESA.

The Application Judge accepted that the termination clause contravened the ESA by excluding commission, and applied the severability clause to remove the part of the termination clause that limited the pay upon termination to be based on base salary only.

On appeal, the issues were: (1) whether the application judge erred by using the severability clause to save the termination provision, and (2) whether the severability clause can have any application on the termination clause if that clause is void as a result of s. 5(1) of the ESA.

The Court of Appeal held that the application judge erred in law by severing only the offending sentence of the provision, when the entire termination clause was void. Where a termination clause contracts out of an employment standard, the entire clause is void and should be struck out.

The Court then considered the impact of a severability clause and identified the following two approaches: (1) the severability clause can be used to remove the illegality in the termination clause or (2) because the termination clause as drafted is void as a result of s. 5(1), there is nothing on which the severability clause can act. The Court rejected the first approach and affirmed that the correct approach is to first assess the termination clause to see whether there is any contracting out of employment standards in breach of the ESA. If there is, then the termination clause is void and there is nothing to which the severability clause can apply. In that case, the severability clause is inoperative in respect of the termination clause.

In summary, the Court placed the onus on the employer to draft a termination clause in the first instance that does not offend the employment standards legislation. If the employer fails to do so, the entire clause will be void and the court will imply the obligation to provide reasonable notice. As a matter of public policy, the Court did not want to allow employers to include provisions that breached these minimum standards, and then allow them to rely on a severability clause to render them enforceable when challenged by the employee.

This decision is somewhat inconsistent with the 2015 decision of Oudin v Centre Francophone de Toronto, Inc., which was affirmed by the Court of Appeal (and for which leave to appeal to the Supreme Court of Canada was later denied). In Oudin, the motion judge relied on a severability clause which directed modification only to the extent necessary to comply with the law. In North, the Court directly addressed this inconsistency, pointed out the different wording of that severability clause, and explained its departure from Oudin by noting that the Court had not yet issued its decision in Wood v Fred Deeley Imports at that time. The Court also cautioned that its endorsement in Oudin should not be viewed as supporting a broad, overarching principle regarding the motion judge's application of the severability provision in that case.

This decision is relevant and may be applied to other jurisdictions in Canada. As such, employers across Canada should ensure that termination provisions are carefully drafted in compliance with minimum employment standards.

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.