Searching for the “Judge-Proof” Termination Clause

Consider a scenario where a former employee who has 15 years of service with the company
initiates a wrongful dismissal lawsuit against you, the employer. Initially, you perceive it to be insubstantial, as you are aware that the employment contract you provided the employee contains a termination clause which explicitly states that they are entitled only to the statutory minimums provided by the employment standards in that region in such circumstances. Additionally, the employee willingly accepted these terms when they were initially hired, seemingly leaving no room for dispute, correct? Not quite.

To your astonishment, a mediator in the case informs you that the termination clause is deemed invalid and holds no legal weight. In order to settle the case, you find yourself compelled to pay the employee the common law notice, an amount significantly greater than what you initially believed you had contractually agreed upon. What led to this unexpected outcome?

The answer? Termination clauses have become increasingly unreliable in Ontario. Since the 2020 decision of the Court of Appeal in Waksdale v. Swegon North America Inc., 2020 ONCA 391, judges in Ontario have been consistently invalidating termination clauses in a substantial number of cases. Much commentary has focused on all the ways termination clauses can go awry under Waksdale; here, we explore the characteristics of a termination clause that can withstand judicial examination.

Termination clauses are crucial because they limit the employer’s legal exposure when dismissing an employee. These clauses almost always state that the employee will receive their statutory minimum payments, but many will continue to state that the employee willingly agrees that there will be no common-law notice pay (which can be much greater than statutory minimum payments).

The termination clause in question in the Waksdale decision denied all notice pay in the event of termination for “just cause”. The court held that this breached the Ontario Employment Standards Act, 2000 (“ESA”) because “just cause” was a lower standard than the standard used by the ESA (under O.Reg. 288/01) for denying notice pay (“guilty of … willful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer”). Applying section 5(1) of the ESA, the Court held that the entire termination clause was void.

The Waksdale judges created a legal splash in three ways:

• They went beyond the text of the contract and searched for any hypothetical scenario in which the clause could take the employer below statutory minimums.
• They held that “just cause” was a lower standard for denying notice pay than that in the statute, thus dooming to fail any termination clause that uses just cause wording.
• They struck down the entire termination clause, not only the parts it said offended the ESA.

Since Waksdale, “[c]ourts in this province have repeatedly held that any provision in the termination clause of an employment agreement that contravenes the provisions of the ESA, or which deprives an employee of their statutory mandated entitlements under the ESA for conduct lower than the standard set by the ESA, renders the entire agreement void.” (Smith J. in Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 4522, para. 26)

By our count, Ontario judges have done this no less than 16 times since Waksdale, for example in Perretta v. Rand A Technology Corporation, 2021 ONSC 2111, paras 43-58; Ojo v. Crystal Claire Cosmetics Inc., 2021 ONSC 1428, paras. 11-25; Gracias v. Dr. David Walt Dentistry, 2022 ONSC 2967, para. 94; and Nicholas v. Dr. Edyta Witulska Dentistry Professional Corporation, 2022 ONSC 2984, para. 59-60. Further cementing this trend, in 2022, the Court of Appeal reaffirmed Waksdale in Rahman v. Cannon Design Architecture Inc. 2022 ONCA 451.

For now, the carnage appears confined to Ontario. No Alberta courts have touched Waksdale. The Saskatchewan Provincial Court recently called Waksdale “good law,” but in obiter dicta (Pederson v. Brandt Developments Ltd., 2021 SKPC 35, para 32). And in British Columbia, courts have referred to Waksdale but not applied it (e.g. McMahon v Maximizer Services Inc., 2023 BCSC 4, para. 25).

Amidst this legal turbulence, is there any secure ground remaining for termination clauses? This depends on whether lawyers or legal professionals can craft a termination clause that is resistant against the Waksdale decision . Here are some strategies to consider:

No Termination Clause: On the theory that you can’t strike down what you can’t see, having nothing about termination ensures you are compliant with the ESA, and you still would have the option to deny ESA notice pay if the “wilful misconduct” standard is met. On the other hand, there is no cap on common law damages with this approach.

Defining What Is Just Cause: While it is beneficial to have a specific, clear, and defined list of offences that would warrant the “just cause” provision, this method still leaves the employer vulnerable as a judge may find even one of the specific offences to be below their conception of “just cause” or below the ESA “wilful misconduct” standard and choose to invalidate the entire clause.

“ESA Saving” Clause: Many employment contracts include a clause saying that regardless of any other term, the employee will get whatever they are entitled to under the ESA. On its face, this approach should suffice, since it would seem to entitle an employee who did not reach the “willful misconduct” threshold to their ESA minimums. However, this has not always worked in practice, as Ontario courts have held that such savings clauses, do not in-fact save anything in the termination clause: see e.g. Campbell-Givons v. Humber River Hospital, 2021 ONSC 6317, para. 38; and Perretta v. Rand A Technology Corporation, 2021 ONSC 2111, para. 58.

Possible Solution? A “Cause-Neutral” Clause: If none of the approaches listed above are viable, another option is to include a termination clause, but not divide it into “Without Cause” and “For Cause” sections. Rather, you would state that on termination of employment for any reason, they will get the minimum required ESA notice. This would ensure that the clause provides for ESA notice pay in the event of a for-cause dismissal, in seemingly perfect alignment with the ESA. You could then add a final term to the clause saying that if the employee has been guilty of “willful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer”, there will be no notice or pay in lieu. This makes the denial of notice the exception rather than the rule in the event of a for-cause termination. As such, it would seem to survive a judge’s search for hypothetical ways it could lead to a denial of minimum entitlements to the employee.

These are just some of the options employers and their counsel have for crafting termination clauses that in future stand a chance of being enforced.

About the Author

This article was written by Tom Archibald, one of the seasoned employment lawyers at HRC Law Professional Corporation. Tom comes with 15+ years of legal expertise in employment and labour law and a passion for helping Canadian employers navigate through complex legal landscapes. Tom’s extensive knowledge covers a wide range of employment issues, including precarious legal situations.