A recent decision from Ontario's Court of Appeal, North v. Metaswitch Networks Corporation, confirms how the courts in our province will assess an employee's severance entitlement where his/her employment was governed by a written agreement that includes a termination provision.
Generally speaking, employees in Ontario are entitled to receive reasonable notice of their without cause dismissal, or pay in lieu of that notice. The courts assess how long a reasonable notice period should be based on a number of factors including an employee's age, length of service, type of job and the availability of comparable positions in the local market.
These default rules of fair severance, however, can be removed by employers who instead have their employees sign a written agreement that specifies some other entitlement in the event of a without cause dismissal. Frequently, this alternative is the minimum amount of notice required under the province's Employment Standards Act ("ESA"). The result of this change for affected employees can be stark. Often it will significantly reduce an employee's notice entitlement from months to weeks. Which, as we can all appreciate, can create a situation where individual's are left for a period of time without any income (with the exception of Employment Insurance benefits, if approved).
While it is lawful for Ontario employers to provide only the minimum amounts required by the ESA, the courts have recognized the onerous impact of this approach on employees. As such, they have generally held employers to an exacting standard in seeking to rely upon termination provisions. That said, there have been a number of decisions in the past couple of years which have upheld arguably unlawful termination clauses in favour of employers, thus creating uncertainty for employees and a possible incentive for employers to not even meet minimum ESA requirements for severance.
Lessons for Employees and Employers
Against this backdrop, Metaswitch Networks is an important case. It continues a recent trend from the Court of Appeal in confirming that employment agreements cannot be approached in the same manner as commercial agreements (given that employees typically lack equal bargaining power), and as such, require protection.
In this case, Mr. North was employed pursuant to a written employment agreement. When his employment was terminated on a without cause basis, a dispute arose as to whether his severance entitlement was limited by the employment contract or whether he was entitled to receive common law reasonable notice. The termination clause in question read:
(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. [emphasis added]
The court found the termination clause to be unenforceable as it violated the minimum requirements of the ESA by permitting payments to be based solely on base salary, thus expressly excluding the employee’s commission (which is required as part of wages under the ESA).
The Court then considered a severability clause in the contract, upon which the employer relied to have the offending language removed, thus rendering the termination clause enforceable. The severability clause stated:
(a) 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.
The court rejected this argument, stating that "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." (para 24, emphasis added)
Accordingly, Mr. North's entitlement upon termination was not limited by the termination clause in his employment agreement. Instead, he was entitled to receive common law reasonable notice, or pay in lieu thereof.
This case is important for two other reasons:
- It confirms the Court of Appeal's approach in its earlier decision of Wood v. Fred Deeley Imports and the fact that employees, unlike equal commercial parties, need protection. Specifically, the courts have now confirmed that employees are vulnerable at the time of dismissal, have less bargaining power, and are generally unfamiliar with their employment rights. The cumulative effect of which is to require precision and clarity from employers in drafting contracts.
- It explicitly address an earlier decision of the Court of Appeal, Oudin v. Centre Francophone de Toronto Inc., in which a severability clause was used to fix an otherwise unlawful termination provision. Metaswitch Networks confirms that the Oudin approach is incorrect, with the Court of Appeal stating:
The problem with this approach is that, to the extent that it effectively rewrites or reads down the offending provisions, it has the very effect referred to by Iacobucci J. in Machtinger – employers will be incentivized to contract out of the ESA but include a severability clause to save the offending provision in the event that an employee has the time and money to challenge the contract in court. (para 40)
Metaswitch Networks is a significant decision. It confirms for employees that the courts will look to protect them, and that employers will be held to a high standard in seeking to rebut their presumed common law obligations with a written termination provision. As such, in any without cause dismissal, employees are best advised to speak with an experienced employment lawyer to ensure they are being treated fairly. Employers, on the other hand, should review their existing employment contracts to ensure that their written agreements will not cause unintended liability.
Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or firstname.lastname@example.org