Waksdale and Ocean Nutrition employment law decisions create uncertainty for employers

Two appellate court decisions handed down last year got the employment law bar talking.

In June, the Court of Appeal for Ontario decided in Waksdale v. Swegon North America Inc. that a “without cause” termination provision in an employment agreement was unenforceable because the employment agreement also contained a “just cause” provision that contracted out of the minimum standards of the Employment Standards Act. (In January, the Supreme Court of Canada denied the respondent leave to appeal the decision.)

In October, the Supreme Court released its judgment in Matthews v. Ocean Nutrition Canada Limited, finding that an employee deemed to have been constructively dismissed was entitled to a payment under a long-term incentive plan because the “realization event” occurred during the reasonable notice period.

Employer-side practitioners find the decisions may have muddied the waters — or at least have been less favourable to employers.

“There’s probably a lot of agreements out there that are thought to be enforceable, on both sides of the bench, even a couple of years ago, that now will be put under much closer scrutiny, and may potentially be found to be unenforceable,” says Daniel Attwell, a partner at Mathews Dinsdale & Clark LLP, an employer-side boutique firm, in Toronto. “That’s the most immediate impact.”

In Waksdale the court held that a “for cause” termination provision in an employment contract that was not compliant with the Employment Standards Act rendered the “without cause” termination provision unenforceable.

The decision is significant “because it applies the law around severability clauses in a way that hasn’t historically been applied,” says Attwell. Traditionally, “if you have eight paragraphs in a contract and one of those paragraphs was offensive, you could strike that one paragraph and the other seven would remain in place, assuming you had appropriate severability language in the contract. The court here is saying, if all eight of those clauses relate to the issue of termination [and one is bad], they’re all out for all purposes.”

One impact of the decision might be to discourage employers to be more generous than what the Employment Standards Act provides for, Attwell says. That’s because it’s easier, he says, to prepare a termination clause in an employment contract that limits an employee’s entitlements to the statutory minimums. A more generous termination clause that provides for a formula — a certain number of weeks’ notice per years of service — is fairly common, but Attwell says Waksdale will make it easier to argue that, for example, an employee can’t be required to work through their statutory severance pay entitlement periods. “And, so, that formula is now out, the whole termination clause is struck,” and courts will then apply the more generous common law severance standards, he says.

“Because of the nuances of how and when notice and severance can and should be paid, there may be some unintended defect which can be effectively exploited to set aside the termination clause.”

For Steven Barrett, however, Waksdale is “yet another case confirming the general principle going back to Rizzo” (Rizzo & Rizzo Shoes Ltd. (Re)), the 1998 Supreme Court judgment regarding the priority of employees’ interests when a company declares bankruptcy. Barrett was lead counsel for the successful appellants: the former employees.

The principle stipulates that, in interpreting the Employment Standards Act, courts should favour an interpretation that encourages compliance and extends protections to employees as broadly as possible, says Barrett, who practises labour law and works on the employee/union side with Goldblatt Partners LLP in Toronto.

There has been considerable litigation over the legality of termination clauses that purport to set out payments on termination of employment, and Waksdale is the latest illustration of courts interpreting those clauses in a way that favours the employee “in the sense that if any part of the clause is unlawful, that clause will be struck down and the employer won’t be able to rely on it,” Barrett says. Underpinning that is the courts’ recognition of the power imbalance between employers and employees in workplaces, he adds.

In Waksdale, the Court of Appeal for Ontario found that where “an employer does not rely on an illegal termination clause, it may nonetheless gain the benefit of the illegal clause.” For instance, when an employee who is not familiar with their rights signs a contract that includes unenforceable termination for cause provisions, they may incorrectly believe that they must behave in accordance with these unenforceable provisions in order to avoid termination for cause. If the employee strives to comply with these overreaching provisions, then their employer might benefit from them “even if the employee is eventually terminated without cause on terms otherwise compliant with the ESA.”

The main issue in Matthews v. Ocean Nutrition was whether damages for failure to provide reasonable notice included an incentive bonus to which the former employee would have been entitled had they been given proper notice; the Supreme Court decided that it did. The court also said that, in order to take away a right from an employee, the wording of the employment contract must “unambiguously limit or remove the employee’s common law rights” or rights to a benefit, Barrett says.

As in Waksdale, for a court to override employees’ rights, “you need to have clear and unambiguous language in order to take away those protections”; absent that, courts will adopt an interpretation that protects employees’ interests, he adds.

Ideally, Waksdale will result in employees and employers settling rather than litigating, “but it’s conceivable that if employers try to impose even more onerous clauses that we may see more litigation.”

Although Ocean Nutrition gives guidance as to when entitlement to benefits might occur after employment is terminated, “unfortunately, it creates some uncertainty for us as well,” says Caroline Spindler, a partner in Mathews Dinsdale and Clark LLP’s Halifax office.

This is because, although the Ontario appellate court gave guidance as to what language might not be significant to limit or prevent a payout to an employee on termination, “it doesn’t tell us what language would be sufficient,” she says.

Spindler has not yet seen a case that has been decided based on Ocean Nutrition, but she predicts “the real test” will come when Ocean Nutrition is adjudicated. “It’s coming down the pike.”

She advises employers to “take a hard look at the language” in their employee incentive plans now and make changes as needed. Many employers may have thought that Matthews was ineligible for the payout he received as they would not have considered him to be an active employee at the time he would have been eligible to receive his benefit under the company’s long-term incentive plan.

Employers should have their contracts regularly reviewed to ensure they are up to date, Attwell says. “Clauses that may have been enforceable a few years ago won’t be now, so this recent decision [in Waksdale] means review your contracts and make it a point to do so on a regular basis.”

Overall, says Spindler, the Ocean Nutrition decision “highlighted the integral part of employment in one’s life — and, in my view, that’s [something] we’re seeing courts recognize more and more.” Courts are placing a greater onus on employers to ensure that employment terminations or limiting employee rights are “on point,” she says. 

Key findings from Waksdale

• a “for cause” termination clause was void because it did not comply with Ontario’s minimum employment standards legislation
• a “without cause” termination clause was also rendered void, even though it was a separate clause and despite a severability provision in the contract

Key findings from Ocean Nutrition

• an employment contract must expressly, clearly and unambiguously remove an employee’s common law right to a bonus or other incentive payment during any common law reasonable notice period
• bonuses or long-term incentive plan payouts are otherwise owed to employees who are constructively dismissed or terminated without cause from their employment