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Your Employment Agreements Are No Good: New Ontario Court Case

By December 5, 2023April 29th, 2024Employment Law

If you are an employer in Ontario and have employment contracts with out-of-date termination language, then it is time to place ‘new team contracts’ at the top of your Holiday Wish List. An October 2023 case reinforces the 2020 Waksdale decision that effectively rendered termination provisions in most pre-2020 employment agreements unenforceable.

Termination Clause Challenges

Although we have been stressing the importance of the Waksdale v Swegon North America (Waksdale) decision since it was released in the summer of 2020, some dentists may not have gotten around to reviewing their employees’ agreements. Well, if you are still relying on pre-2020 contracts, chances are that those aren’t enforceable anymore.

Why? The Waksdale court decision stands for a number of judge-made rules (or common law rules), but the pertinent one which affects ALL employment agreements is this:

If even part of a termination clause is invalid (in that it does not meet the minimum standards of the Employment Standards Act, 2000 (the ESA)), then ALL of the termination provisions in the contract – irrespective of whether it addresses termination without cause or for cause – will also be invalid.

This means that courts will not actually care which clause (whether termination for cause or without cause) the employer relies on to dismiss someone. Even if a dentist employer isn’t relying on the defective clause, the effect of one bad termination-related proviso will be that all termination-related clauses in the contract are treated as one. In other words, one bad apple will spoil the bunch.

Oz Optics Case

In the recent Superior Court of Justice’s Divisional Court decision in Oz Optics Limited v Summers (Oz Optics), which reinforces Waksdale, the Court had useful guidance for employers. The case is not only a reminder of the principles outlined in Waksdale but also helpfully outlines the distinction between firing for ‘just cause’ (a common law standard) and the ‘wilful misconduct’ standard for cause outlined in the ESA. As we will see from the Court’s decision in Oz Optics, one standard ranks above the other, which employers may not realize. This ranking is a key consideration when deciding to dismiss employees without notice or pay for bad behaviour. In addition, Oz Optics serves to remind dentist employers everywhere that the common law’ soft ceiling’ on wrongful dismissal damages – up to/around 24 months’ worth of termination notice or pay in lieu – is not a hard and fast rule by any means.

Background

In the facts of Oz Optics, a senior draftsperson (a specialized senior technical position) was earning $75k annually plus benefits. After 3 ½ years of employment, on February 28, 2022, he was fired without cause. The employee was 61 years old and remained unemployed up to the date of trial. He did not receive the benefit of career transition counselling or a reference letter.

In the ensuing trial, the critical issue was whether the dismissal was wrongful for lack of proper termination pay in lieu.

The Decision

The trial judge reviewed the employment agreement and found it unenforceable, as it was offside of Waksdale. The judge awarded the employee 6 months of pay ($35,743.13), minus certain prescribed payments made by the employer. Yes, 6 months – you read that right. Although the employee’s length of service was 3 ½ years, after considering things like the employee’s age, seniority in the company, ability to find alternate employment, etc., the judge went over and above the ‘1-month-per-year-of-service’ rule of thumb and awarded more than 3 ½ months’ worth of pay! See how flexible judges can be when it comes to the common law? And usually, it comes out in favour of the employee and NOT the employer.

The employer challenged the decision for factual and legal errors. However, the Ontario Divisional Court found that the trial judge had made no error, dismissed the appeal and ordered another $10,000 in costs against the employer. Notably, the Ontario Divisional Court found that the lower Superior Court’s assessment of 6 months of damages in light of all the factors mentioned above was within the range of what could be considered reasonable.

Why Does This Matter?

Firstly, Oz Optics is another in a growing list of post-Waksdale cases where employers are being caught with outdated, improperly drafted ‘with cause’ termination provisions. Not only did the Court rely on Waksdale to arrive at their conclusion, but they were also guided by the Court of Appeal’s decision in Rahman v Cannon Design Architecture Inc.

In the case at hand, the challenged provision stated that:

“This Agreement may be terminated effective at any time for cause by OZ OPTICS without notice or pay in lieu of notice, or severance pay, or payments to the Employee whatsoever, except payment of wages and vacation pay earned to the date of termination. 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”.

As the trial judge in Oz Optics concluded, this provision allowed “a much broader exemption” from the ESA’s rules about minimum notice or pay in lieu. The fact that it listed specific (and incorrect) instances where one could be fired immediately without any statutory notice or pay in lieu (e.g., “conflicts of interests” and “documented unsatisfactory performance”) made it such that it fell well below the wilful misconduct standard prescribed by the ESA’s regulations. As the trial judge noted, the conduct captured above was “not sufficiently serious to satisfy the ESA criteria [for absolving the employer of the obligation to provide notice or pay in lieu].”

Statutory Cause vs. Just Cause

Secondly, the Oz Optics case again reinforced that the common law standard of ‘just cause’ is lower/easier to prove than the ESA’s prescribed ‘wilful misconduct’ standard. For clarity, the strict statutory language in subsection 2(1)(3) of Regulation 288/01 sets out a standard of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” This has been a notoriously hard standard to reach, as there are five elements to prove for an employer to take advantage of the subsection 2(1)(3) exemption (see the legal test for these elements as set out in Scherling v Martin Pet Foods, 2002). By comparison, the ‘just cause’ standard at common law requires a contextual, broader analysis encompassing more possible grounds for dismissal.

Employer Damages

Finally, the Court’s damages award was in excess of the usual ‘soft’ common law damages threshold of one month per year of service. Applying the factors often cited from the leading case on determining reasonable notice or pay in lieu, the Divisional Court found no reason to deviate from the trial court’s finding that the employee plaintiff was entitled to 6 months’ worth of common law damages, even though he had only been with the employer for 3 ½ years. Even at the challenge to the Divisional Court, it was found that the lower court’s assessment of 6 months of damages, in light of all the factors such as the employee’s age, seniority in the company, ability to find alternate employment, etc., was within the range of what could be considered reasonable.

Bottom Line

The Oz Optics case serves as a reminder that if you have introduced contracts to your team members in the past (i.e., in or before 2020), you absolutely need to check those contracts ASAP to see if they can pass the Waksdale test. We recommend that all dentist employers have their employment contracts reviewed.

  • If you have a pre-summer 2020 employment agreement in place with your team members, you will need to have those agreements reviewed for the deficient/offensive termination provisions to make sure they don’t cause a problem for you if someone is terminated or when you sell your practice.
  • If you have a post-summer 2020 employment agreement, unless they were prepared by a lawyer well-versed in Waksdale challenges and the other cases that came after it, it may still contain termination language that will render it unenforceable.

And, if you are considering selling your dental practice within the next five years, having proper wording in your employment agreements is especially vital. Valid employee contracts can help insulate you from purchasers looking to discount the purchase price or claiming you are liable for future termination costs.

If you need help drafting or revising employment agreements or have questions about your contracts’ validity, we are here for you. We are happy to help and offer more information on these and any other employment issues. DMC is dedicated to helping dentists understand and minimize the risks associated with being an employer. Send DMC an email or call our team at 416-443-9280 extension 206.

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.
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