Fired for Cause? Severance withheld? Check your contract!

One of the ways an employee can be terminated from employment is "for cause". If there is cause, the employee would have no entitlement to any severance. This is a severe consequence. We call it the "capital punishment" in employment law. Naturally, for this to apply, there has to be a serious enough misconduct.

Many employers incorporate a termination for cause provision in their employment contracts precisely for that reason – to be able to exclude an employee's termination entitlements where cause is alleged. But is such a clause appropriately drafted, and therefore, enforceable? That is the question.

Termination for cause provisions must comply with the Employment Standards Act, 2000, S.O. 2000 c 41 ("ESA"). That is now the law. The ESA provides employees minimum termination entitlements, unless the employer can prove the employee is "guilty of wilful misconduct, neglect of duty, incompetence or conduct incompatible with his duties." (s. 2(1)(3) of O Reg 288/01).

This notion of "wilful misconduct" is a very high threshold to meet. It requires a subjective element – the employee must know their conduct was poor. Consequently, wilful misconduct is often very difficult to prove.

Contrast that to the common law – the law made by our Courts through precedents and decisions, which is equally binding and typically more generous than the ESA. The common law cause is defined differently. Unlike the ESA, it is based on "serious misconduct". Unlike the ESA, common law cause does not require a subjective element – the employee does not necessarily need to know their conduct was poor. In other words, common law cause is in fact a lower threshold than the ESA wilful misconduct.

The operation of the two different thresholds often lead to a bizarre situation. An employee terminated based on the lower threshold of common law cause may still have ESA entitlements on termination, unless the higher wilful threshold can also be met.

So, how does this impact an employer's ability to rely on termination for cause provisions?

The distinction between ESA wilful misconduct and common law cause can lead to complexities in drafting, and enforcing, these provisions. If a termination for cause provision allows the employer to withhold all termination entitlements on the basis of the lower common law cause threshold alone, then there is a risk that the provision might fall foul of the employer's obligation to comply with the ESA.

The Ontario Superior Court of Justice considered this issue in the case of Khashaba v. Procom Consultants Group, 2018 ONSC 7617 in September 2018. In that case, the employer attempted to rely on a termination provision in alleging that the employee had no entitlements upon termination. The employee argued the termination provision was unenforceable because the "termination for cause" sub-clause attempted to circumvent the minimum ESA threshold, which was a violation of the ESA.

After reviewing the differing thresholds between wilful misconduct and common law cause, the Ontario Superior Court of Justice agreed with the employee. The "termination for cause" sub-clause violated the ESA and was void.

The key takeaway is that problematic language in a termination for cause provision can result in the provision being unenforceable. This can be fatal to the employer and a saving grace for an employee who has engaged in some misconduct.

This notion was revisited and affirmed once again in March 2019 in the case of Groves v. UTS Consultants Inc., 2019 ONSC 5605. In that case, the employee was terminated on a without cause basis. However, the employee argued that his employment agreement was unenforceable on a number of grounds, including that the termination for cause provision did not comply with the ESA. The termination for cause provision stated the employee could be terminated "at any time for cause without notice or pay in lieu". The employee submitted that this would permit termination with no notice based on the lower common law threshold, as opposed to the ESA standard of wilful misconduct.

The Ontario Superior Court of Justice once again found the employer's termination for cause provision would likely be void. The Court emphasized that the ESA requires an employer to provide notice of termination unless they can demonstrate "willful misconduct…that is not trivial and has not been condoned by the employer."

Takeaways:

These decisions confirm that a termination for cause provision will be enforceable only if it complies with the minimum ESA requirements. Provisions that use unclear language or outdated definitions may be subject to challenge by the departed employee.

Theses decisions underscore the importance for employers to seek the assistance of an employment lawyer when drafting and reviewing their termination provisions, and likewise for employees to obtain legal advice on their rights prior to signing employment contracts.

For other important legal updates on termination provisions and their enforceability, read our blog post here: Termination Provisions – A Legal Update.