On June 8, 2022, the Ontario Court of Appeal (“ONCA”) released its eagerly awaited decision in Rahman V Cannon Design Architecture, 2022 ONCA 451 (“Rahman”). The ONCA overturned the decision of Justice Dunphy at the Ontario Superior Court (“ONSC”), which upheld an otherwise illegal termination provision because the employee sought legal advice prior to signing her employment contract.

The key takeaway for employers is that the best way to protect against costly wrongful dismissal claims is by reviewing and updating your employment agreements, or face the consequences.

Rahman at the Ontario Superior Court

Justice Dunphy’s initial decision gave employers a glimmer of hope following the ground-breaking case Waksdale v Swegon North America Inc. (“Waksdale”), which invalidated many termination provisions in Ontario. In Waksdale, the ONCA concluded that if any of the provisions of the entire termination clause fail to comply with the Employment Standards Act (“ESA”), then all its provisions will fail. Practically, this means that because many “for cause” termination provisions are unenforceable, the entire termination clause is unenforceable, and employers cannot rely on it to limit an employee’s entitlement to common law reasonable.

Rahman gave employers a lifeline following Waksdale because it supported employers’ arguments that termination provisions should be strictly interpreted in favour of employees. At the ONSC, Justice Dunphy rejected the Plaintiff’s argument that the “just cause” termination provision in the employment agreement amounted to contracting out of the ESA, distinguishing it from Waksdale. Justice Dunphy concluded that a strict or adverse construction approach to the termination provisions in Rahman should not be applied because, among other things:

• The employee was reasonably sophisticated and had the benefit of independent legal advice;
• There was no marked inequality of bargaining power; and
• The termination provisions were negotiated.

This decision meant that, even if a termination provision was unenforceable based on the language of the employment agreement, employers could still rely on the surrounding context to argue the termination provision is enforceable.

Rahman at the Ontario Court of Appeal

Unfortunately for employers, the ONCA overturned Justice Dunphy’s decision. The ONCA stated that subjective considerations should not override the plain language of the termination provisions. Ultimately, it is the wording of the termination provision which determines whether it contravenes the ESA, not contextual considerations.

Why this decision matters for your business

Most importantly, this decision reinforces that your best defence against costly wrongful dismissal claims is enforceable termination provisions. As noted above, if your employment agreements are more than a few years old, there is a real risk that Waksdale rendered the termination provisions unenforceable.

Every once in a while, a court decision comes along that completely changes how contracts will be drafted going forward.  We’ve seen how game-changing decisions on the wording of termination “without cause” provisions, and bonus and additional compensation entitlement provisions, have sent employers scrambling to rewrite the terms of their employment agreements and compensation plans.

On June 17, 2020, another game-changing decision was released by the Court of Appeal in Waksdale v. Swegon North America Inc., 2020 ONCA 391 (“Waksdale”), where it overturned a dismissal of a claim.

The employer had terminated the plaintiff and relied on the termination without cause provision of the employment agreement.  This basically provided for minimum entitlements under the Employment Standards Act, 2000 (“ESA”), plus one week, rebutting the presumption of common law reasonable notice.  The plaintiff sued for wrongful dismissal, arguing that the presumption of entitlement to common law reasonable notice had not been rebutted, since the termination with cause provision in the agreement was invalid, therefore all the provisions relating to termination should be invalidated, even if the without cause provision might be independently enforceable.  The plaintiff also argued that the employment agreement’s severability clause should not be effective to sever the unenforceable provisions from the valid provisions.

The Court of Appeal agreed with the plaintiff, and found that this employee was entitled to common law reasonable notice.  The case stands for a broader proposition that the presumption of reasonable notice can only be rebutted if all the provisions of the entire termination clause comply with the ESA.   If any of the provisions of the entire termination clause fail to comply with the ESA, then all its provisions will fail.

It does not matter if (1) the termination clause is broken down into different clauses within the employment agreement; (2) there is a severability clause in the agreement which severs the illegal clauses from the rest of the agreement; (3) the employer does not rely on the breaching provision; or (4) the employer’s subsequent behaviour complied with the ESA.

What does this mean for employers?

Historically, a validly written termination clause in employment agreements has been an effective way to control the termination costs for employers.  The focus had been on tight drafting of the “without cause” termination clause in employment agreements, which were used to rebut the common law presumption of reasonable notice, independent of the validity of termination “with cause” provisions.  Prior to Waksdale, such an approach had previously been upheld:  Khashaba v. Procom Consultants Group Ltd., 2018 ONSC 7617.

This decision will impact the vast majority of written employment agreements, and thereby significantly affect many employers’ risk management strategies.

More significantly, in these challenging pandemic and post-pandemic times, as businesses struggle to survive, the consequences from the Waksdale decision could be devastating, especially after the pandemic-related emergency leave is no longer available.  Since many businesses are not immediately bouncing back to full capacity as emergency restrictions are lifted, restructuring or employment terminations are inevitable.   Employers may be hit with unanticipated hefty costs when terminating employees, which could tip the scale from just being able to recover to insolvency.

Moving forward – with better employment contracts

All employers are urged to have their employment contracts reviewed, in light of this game-changing Court of Appeal decision, and to thereafter have their contracts reviewed once a year, to take into account other developments in the law.

If you are uncertain whether the Waksdale decision affects your employment agreements, negatively or you would simply like to speak with an employment lawyer about your employee contracts moving forward, contact Hum Law Today.  We are employment law experts well-versed in drafting employment contracts.