Ontario Court of Appeal: Termination clauses invalid, full severance owed

Waksdale v Swegon North America: why employees should obtain legal advice before accepting a new contract

On June 17, 2020 the Ontario Court of Appeal released a decision called Waksdale v. Swegon North America (2020 ONCA 391) (“Waksdale”).

Without question, the impact of this case will be felt for years to come.

Why? As a result of Waksdale, thousands of companies in Ontario may no longer be able to rely upon termination clauses in their current employment agreements to limit the amount of severance pay owed to terminated employees.

This article will establish the importance of employment contracts, the impact of this recent court decision, and what an employee’s next steps should be.

Waksdale v Swegon North America: What happened?

In Waksdale, the Ontario Court of Appeal held that a termination clause was unenforceable based on specific language that the court considered illegal. As a result, the employee was awarded his full severance pay.

The reason this particular decision is so monumental is that this same illegal language can be found in the vast majority of employment contracts signed by employees across the province. In turn, employers can no longer rely on these contracts to limit their employees’ termination entitlements. Instead, these employees are now owed their full severance in the event they are terminated.

How does a termination clause work?

In Ontario (and across Canada), employers often present employees with employment contracts that contain restrictive language regarding their severance entitlements upon termination. That restrictive language is commonly known as a “termination clause”.

If drafted properly, these termination clauses will ensure that the employer does not have to pay the employee their full severance entitlement. Instead, an employer may be allowed to pay only the minimum amount of termination pay as required by provincial legislation, known as the Employment Standards Act.

The difference between an employee’s full entitlement and minimum entitlement can be substantial. By signing a new employment contract, an individual could be giving up tens, if not hundreds of thousands of dollars.

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I signed an employment contract. Should I be worried?

If you are reading this and are now panicked because you signed at least one employment contract during the course of your employment, there is good reason not be concerned.

The legal system appreciates that employees are the more vulnerable party in the employee-employer relationship. Judges know that companies have high-priced lawyers drafting their contracts. Judges also know that you, as an employee, have very little understanding of the law and most likely did not even read the termination provision in your contract when you signed it.

As a result of this power imbalance, courts in Ontario have consistently held that in order for a company to rely upon these termination provisions, they must be drafted using extremely precise language. If exact specifications are not met, the termination clause will be considered illegal and unenforceable, and the employee will be entitled to his or her full severance.

How employers will react to Waksdale

The obvious result of Waksdale v. Swegon North America is that many employers will be incredibly concerned about not being able to rely on their current termination clauses to avoid paying out full severance, especially when these amounts are not accounted for in their budgets.

These companies will immediately contact their lawyers to draft new employment contracts. These companies will immediately contact their lawyers to draft new employment contracts that do not contain the language found to be illegal in Waksdale.

What should I do if I am asked to sign a new employment contract?

In the coming weeks, I expect that many companies will present their employees with a new employment contract. Businesses may even offer these employees a significant bonus or raise to sign it.

If this happens to you, you should think twice about signing. A bonus of $1,500 or raise of 5% is worth nothing compared to the tens of thousands of dollars in severance pay you could be giving up by signing the new agreement.

At minimum, it is imperative that you arrange for a consultation with one of our employment lawyers to discuss the new agreement and the implications it may have on your severance pay.

I have been laid off, and have an employment contract. What should I do?

This article has explained how employment agreements may not always be enforceable. Perhaps the termination clause has been poorly constructed, or is entirely absent. A decision by the courts may render a particular clause invalid, as is the case with Waksdale.

It is therefore important to have our team review your employment contract immediately following your termination. We can determine, through our knowledge of the current labour and employment laws, if you are entitled to more severance pay.

Do not assume that your rights no longer exist, simply because your contract contains a termination clause.

I was laid off within the last two years, but couldn’t get my full severance pay because my contract had a termination clause. Can I do anything about it now?

Yes, you can still take action.

An employee in Ontario has two years from the date of termination to pursue their severance pay. An employment lawyer at Samfiru Tumarkin LLP can work to secure your fair severance package.

If you were let go within the last two years, but the amount of severance pay you received was limited by a termination clause in your employment contract, you must call us immediately. Our team can review your situation, and determine if we can now enforce your rights and get your full termination pay.