Employment agreements often contain provisions about what should happen when an employee is terminated. For example, an agreement may seek to remove an employee’s ability to claim a common law period of reasonable notice in the event of termination without cause, with the employee only entitled to the statutory minimum period under the Employment Standards Act 2000 (ESA).

This article looks at the recent decision of the Court of Appeal for Ontario in Rahman v Cannon Design Architecture Inc., in which an employment agreement attempted to do such a thing. The Court of Appeal overturned the decision of the Ontario Superior Court of Justice, which we previously reported on, finding that the contractual termination provisions contravened the ESA and therefore could not govern the employee’s termination.

Employee signs multiple employment agreements with multiple entities 

An employee began working for CannonDesign in 2016 as a senior architect, principal and office practice leader. 

First, she signed an Offer Letter, which described CannonDesign as a legal entity of Cannon Design Architecture Inc. (CDAI). This letter provided that, in the absence of just cause, the maximum liability of the company “shall be limited to the greater of the notice required in your Officer’s Agreement or the minimum amounts specified in the ESA”. It also said that CannonDesign maintains the right to terminate the employment without notice or payment in lieu if there is just cause to terminate.

Secondly, the employee signed an Officer Agreement with the Cannon Corporation. It said that if the employee is terminated for cause, the employee would receive one month’s notice. However, the Offer Letter said that in the event of a conflict between the agreements, the Offer Letter (rather than the Officer Agreement) prevails.

Employee terminated without cause and given four weeks’ salary

In 2020, CannonDesign terminated the employee’s employment without notice and without cause. The termination letter stated that she would receive four weeks of termination pay.

The employee commenced proceedings against CDAI, Cannon Design Ltd. and the Cannon Corporation, claiming damages for wrongful dismissal. She moved for summary judgment, asking the court to declare that the termination provisions of her employment agreements were void and that the respondents were her common employers.

Motion judge decides the termination provisions were valid and that CDAI was the employer

The motion judge interpreted the termination provisions in the agreements as requiring the payment of the minimum notice required by the ESA, and accordingly, found them to be valid. His Honour determined that the for cause termination provisions were also valid, relying on the facts that the employee had received independent legal advice about the offer of employment and was sophisticated and experienced, along with the parties’ intention to comply with the ESA minimum standards.

The motion judge also decided that CDAI alone was the employer because it made the offer of employment and paid her. His Honour, therefore, dismissed the action against Cannon Design Ltd. and the Cannon Corporation.

Court of Appeal finds the termination provisions void for contravening the Employment Standards Act

Justice of Appeal Gillese, writing for the Court of Appeal, looked at the plain language of the termination provisions of the agreements. Her Honour decided that the just cause provision of the Offer Letter prevailed as there was a conflict. This allowed no notice or payment if there was just cause to terminate. 

However, ESA notice and termination pay must be given for all terminations, even those for just cause, except for prescribed employees. The provisions of the Termination and Severance of Employment Regulation contain the circumstances disentitling employees from the statutory termination pay, relevantly employees “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”.

Her Honour explained that the wilful misconduct standard is different from that of a just cause termination, requiring evidence that the employee was “being bad on purpose”. Given there was nothing in the agreement limiting the just cause termination provision to terminations for wilful misconduct, the just cause termination provision contravened the ESA and was void.

Courts have repeatedly held that if a termination provision in an employment contract violates the ESA, all the termination provisions in the contract are invalid. This case was no different, with her Honour finding all the termination provisions in the employment contract void, even though the employer had not attempted to terminate the employee for just cause.

Furthermore, the Court of Appeal finds that the entities were common employers

Justice of Appeal Gillese also disagreed with the motion judge’s assessment of which entity was the employer. Her Honour noted that the Officer Agreement stated that the Cannon Corporation was the employer and that a significant part of the employee’s annual bonus was paid by way of shares in that Corporation. 

Her Honour decided that the three entities were common employers because they were sufficiently intertwined and exerted sufficient control over the employee’s activities, such that there was an intention to create an employer/employee relationship between the employee and the related companies.

As a result, the three entities were jointly and severally liable for any damages. The Court of Appeal remitted the action back to the Superior Court to determine the quantification of damages for failure to provide reasonable notice. Given that the termination provisions in the agreements are void, the employee may be entitled to the payment of common law reasonable notice.

Contact Grosman Gale Fletcher Hopkins LLP in Toronto for Guidance on Employee Contracts and Termination

This decision highlights the need to negotiate and draft the termination provisions of employment agreements very carefully. At Grosman Gale Fletcher Hopkins LLP, we have been on both sides of written employment agreements. Our employment lawyers have a deep understanding of labour and employment matters. We have drafted, reviewed, and edited thousands of employment contracts and advised both employers and employees on their rights in the workplace.We are one of Canada’s most recommended labour and employment law firms. If you need guidance with a workplace-related issue, contact us online or at 416.364.9599.