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Employment - Contracting-Out of Common Law Pay-in-Lieu

. Oz Optics Limited v. Summers

In Oz Optics Limited v. Summers (Div Court, 2023) the Divisional Court considers contractual terms which attempt to circumvent common law wrongful dismissal rights:
(i) A Void and Unenforceable Agreement

[20] In my view, the trial judge correctly held that the issue of the enforceability of the agreement fell to be decided by reference to the recent decision of the Ontario Court of Appeal in the case of Waksdale v. Swegon North America Inc., 2020 ONCA 391, [2020] O.J. No. 2703 (“Waksdale”).

[21] The trial judge correctly held that Waksdale stood for the proposition that the termination provisions of an employment agreement must be looked at as a whole when determining whether they comply with the minimum requirements in the ESA. That analysis compelled the court to examine the clauses dealing with both termination for cause and termination without cause notwithstanding that the termination here was without cause.

[22] The trial judge was properly guided by the Court of Appeal decision in Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451, [2022] O.J. No. 2603 (“Rahman”), which summarized the state of the law in this province at para. 30 of its decision:
This court has repeatedly held that if a termination provision in an employment contract violates the ESA – such as a “no notice if just cause” provision – all the termination provisions in the contract are invalid.
[23] Citing its earlier decision in Waksdale, the Court of Appeal made abundantly clear the fate that would befall the entirety of such contracts if a with cause provision violated the ESA:
In Waksdale, as in the present appeal, the employer had not purported to terminate the employee for just cause. However, the just cause provision in the employment contract violated the ESA. The invalidity of the just cause provision rendered the other termination provisions unenforceable: Waksdale, at para. 10.
[24] The trial judge then went on to cite recent Ontario decisions that have applied Waksdale in concluding that where a ‘for cause’ provision in an employment agreement violates the ESA, all termination clauses in that agreement are void and unenforceable, thereby entitling the employee to full common law notice.

[25] The trial judge considered subsection 2(1)(3) of the regulation which carves out an exemption for entitlement to notice of termination or termination pay under the ESA for an employee who has been guilty of willful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer.

[26] In my view, the trial judge correctly held that the common law standard of just cause was lower than the willful misconduct standard prescribed in the regulation. That being the case, not all cases of common law just cause would satisfy the subjective intent that is required to meet the higher ESA standard.

[27] The trial judge proceeded to review the whole of the agreement. In doing so, he paid particular attention to wording in the ‘with cause’ section of the agreement which reads, “Cause includes, but is not limited to, acts of theft, fraud, insubordination, conflict of interest and documented unsatisfactory performance, as well as any violation of schedule A, B & C to this agreement.”

[28] Correctly applying the rationale in Waksdale, the trial judge found that the “for cause” termination provision necessarily captured conduct that was not sufficiently serious to satisfy the ESA criteria for absolving the employer of the obligation to provide statutorily required notice or payment in lieu of notice.

[29] That being the case, the trial judge concluded that the termination for cause provision in the agreement purported to create a much broader exemption from the obligation to provide notice and severance pay than is permitted by the ESA. It followed that the agreement was void and unenforceable, as being inconsistent with the threshold requirements of the ESA.

[30] I can find no palpable or overriding error on the part of the trial judge. It was open to him to interpret the agreement in the manner that he did. It was open to him to conclude that the wording of the agreement sought to create a broader exemption for termination then was permissible. The trial judge correctly applied the appropriate law in Rahman and Waksdale to the facts of the case and his reasonable interpretation of the agreement. That done, he properly concluded that the agreement was void and unenforceable.

[31] I would give no effect to this ground of appeal.
. Howard v. Benson Group Inc. (The Benson Group Inc.)

In Howard v. Benson Group Inc. (The Benson Group Inc.) (Ont CA, 2020) the Court of Appeal affirmed that a contactual term that varies from the common law (such as in Bardal), must be "unequivocal":
[29] The respondent sought to use a fixed term contract either to eliminate its severance obligation entirely or to limit it to two weeks’ notice on an early termination. It was, of course, free to do this. But the courts have consistently held that the consequences to an employee of such a bargain are so significant that the employer must communicate clearly in the contract that this is what it is intending to do: Ceccol, at para. 27. If an employer does not use unequivocal, clear language and instead drafts an ambiguous or vague termination clause that is later found to be unenforceable, it cannot complain when it is held to the remaining terms of the contract.

[30] I conclude that the motion judge erred in not finding that the Employment Contract, without Clause 8.1, clearly established a notice period equal to the unexpired portion of the fixed term contract. The motion judge further erred in not finding that this notice period ousted the common law presumption of reasonable notice.
. Celestini v. Shoplogix Inc.

In Celestini v. Shoplogix Inc. (Ont CA, 2023) the Court of Appeal states the doctrine that parties may 'contract out' of the common law pay-in-lieu of reasonable notice doctrine ('pay in lieu'), as long as they don't violate the minimum standards of the ESA:
[30] The common law implies a term into an employment relationship of indefinite duration that the employee will receive reasonable notice before being discharged without cause. Reasonable notice is generally determined by reference to factors such as the character of the employment, the length of service, the age of the employee, the availability of similar employment, and the experience, training and qualifications of the employee: Machtinger v HOJ Industries Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, at pp. 998-99. It follows that what will constitute reasonable notice for a specific employee may change over time, as the employee gains greater seniority and responsibility.

[31] The law also recognizes that, as long as the minimum requirements of the Employment Standards Act, 2000, S.O. 2000, c. 41 are not infringed, parties to an employment arrangement may prescribe, by express contract, the entitlements of the employee on termination, and if they do so, these will apply instead of the implied term of reasonable notice: Machtinger, at pp. 999-1000.
. Matthews v. Ocean Nutrition Canada Ltd.

In Matthews v. Ocean Nutrition Canada Ltd. (SCC, 2020) the Supreme Court of Canada confirms that contractual employment terms which limit or eliminate common law rights (typically reasonable notice) in standard (non-negotiated) contracts, are to generally be read narrowly. The reference to Tercon places this issue on the same basis as other contractual liability allocation law:
[64] The question is not whether these terms are ambiguous but whether the wording of the plan unambiguously limits or removes the employee’s common law rights (Paquette, at para. 31, citing Taggart, at paras. 12 and 19-22). Importantly, given that the LTIP is a “unilateral contract”, in the sense that the parties did not negotiate its terms, the principle of contractual interpretation that clauses excluding or limiting liability will be strictly construed “applies with particular force” (Taggart, at para. 18, citing Hunter Engineering Co. v. Syncrude Canada Ltd., 1989 CanLII 129 (SCC), [1989] 1 S.C.R. 426, at p. 459). As this Court recognized in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at para. 73, albeit in the commercial context, and cited here to underscore just this point, sophisticated parties are able to draft clear and comprehensive exclusion clauses when they are minded to do so.

[65] To this end, the provisions of the agreement must be absolutely clear and unambiguous. So, language requiring an employee to be “full-time” or “active”, such as clause 2.03, will not suffice to remove an employee’s common law right to damages. After all, had Mr. Matthews been given proper notice, he would have been “full-time” or “actively employed” throughout the reasonable notice period (Paquette, at para. 33, citing Schumacher v. Toronto-Dominion Bank (1997), 1997 CanLII 12329 (ON SC), 147 D.L.R. (4th) 128 (Ont. C.J. (Gen. Div.)), at p. 184; see also para. 47; Lin, at para. 89). Indeed, the trial judge and the majority of the Court of Appeal agreed that an “active employment” requirement is not sufficient to limit an employee’s damages (trial reasons, at para. 398; C.A. reasons, at para. 66).

[66] Similarly, where a clause purports to remove an employee’s common law right to damages upon termination “with or without cause”, such as clause 2.03, this language will not suffice. Here, Mr. Matthews suffered an unlawful termination since he was constructively dismissed without notice. As this Court held in Bauer v. Bank of Montreal, 1980 CanLII 12 (SCC), [1980] 2 S.C.R. 102, at p. 108, exclusion clauses “must clearly cover the exact circumstances which have arisen”. So, in Mr. Matthews’ case, the trial judge properly recognized that “[t]ermination without cause does not imply termination without notice” (para. 399; see also Veer v. Dover Corp. (Canada) Ltd. (1999), 1999 CanLII 3008 (ON CA), 120 O.A.C. 394, at para. 14; Lin, at para. 91). Yet, it bears repeating that, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as “terminated” until after the reasonable notice period expires. So, even if the clause had expressly referred to an unlawful termination, in my view, this too would not unambiguously alter the employee’s common law entitlement.


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Last modified: 24-10-23
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