You Only Get One Shot – Ontario Court of Appeal Says Severability Clauses Cannot Save Improper Termination Provisions 


November 2017

Employment Law Bulletin

Ontario employers, employees, and, especially, their lawyers, have spent plenty of time grappling with the interpretation of termination clauses in recent years. With its decision in North v. Metaswitch Networks Corporation (2017 ONCA 790), the Court of Appeal for Ontario may have settled a good deal of the debate on when a termination clause is illegal and when such a clause may be saved by a severability clause.

The key dispute in North was the interpretation of a termination clause which limited pay in-lieu of notice to the minimum required under the Ontario Employment Standards Act, 2000 (“ESA”) and included the following line:

“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.”

The court found that the above phrase illegally purported to limit North’s notice to less than his entitlement under the ESA, since that entitlement would not include commissions. However, the respondent employer relied on a severability clause in the same contract to save the termination provision by removing the impugned language. The severability clause stated:

“If any part of the Agreement is found to be illegal or otherwise unenforceable ... that part shall be severed from this Agreement and the rest of the Agreement’s provisions shall remain in full force and effect.”

The application judge found that the severability clause could be used to strip the illegal wording from the termination provision and salvage the remainder while still limiting North’s notice to the ESA minimum. In doing so, the application judge relied on Oudin v. Centre Francophone de Toronto Inc. (2015 ONSC 6494, aff’d 2016 ONCA 514), wherein the court found that a single offending element of a termination clause could be severed to save the remainder of the clause.

In his appeal, North relied on the 2017 decision in Wood v. Fred Deeley Imports Ltd. (2017 ONCA 158), in which the court found, among other things, that “termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA” and that where there are two possible interpretations of a clause “courts should prefer the interpretation that gives the greater benefit to the employee.”

Faced with squaring an apparent circle and reconciling Oudin with Wood, the Court of Appeal elected to apply the principles in Wood to the attempted use of severability clauses to salvage termination provisions that can be interpreted as non-compliant with the ESA. Relying on Wood and the principle that where a termination clause contracts out of the ESA the entire clause must be found void, the Court found that the application judge erred at law by severing only the offending portion of the termination provision, rather than the entire provision.

Therefore, as a rule, North stands for the proposition that, even where a contract contains a severability clause, a termination clause is void if it contains even one instance of contracting out of the ESA.

Comments on Severability Clauses

In North, the Court of Appeal discussed the use of severability clauses in employment contracts. In a decision that is unfriendly to employers, the court flatly rejected the approach in Oudin whereby a severability clause could be used to modify a termination clause to the extent necessary to comply with the law.

Instead, as stated above, the result from North is that any termination clause which attempts to contract out of the ESA (contracting out of the ESA is barred s. 5 of the ESA) – such as by limiting notice pay to base salary only (if for the ESA minimum period) – is void and cannot be saved by a severability clause. Importantly, the court wrote that this approach does not make the severability clause void. Rather, it means that a severability clause cannot have an effect on another clause that is rendered void by statute. Terms rendered void by statute, including by section 5 of the ESA, are “null and void for all purposes and cannot be rewritten, read down or interpreted through the application of a severability clause to provide for the minimum standard imposed by the ESA.”

What Employers Should Know

That a termination provision in an employment contract must be carefully constructed is nothing new. However, North reinforces the importance of ensuring that all possible components of an employee’s remuneration during a notice period (or through pay in-lieu of notice) are included in any statutory notice provided. Further, employers must not rely on termination clauses that can be interpreted in a way that excludes a potential benefit because a severability clause won’t save an offending termination provision. As the title of this article suggests, “you only get one shot.”

by Kyle Lambert

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2017