Ontario Court of Appeal overturns decision upholding just cause termination provision

Last year, we reported on the Ontario Superior Court’s decision in Rahman v. Cannon Design Architecture Inc. (the “Rahman decision”), in which the Court upheld a contractual termination provision on the basis of the relative equality of bargaining power between the plaintiff and her employer, among other reasons. This was a welcome decision for Ontario employers as it appeared to address the absurdity of the effect of the Ontario Court of Appeal’s decision in Waksdale v. Swegon North America Inc. (the “Waksdale decision”). In Waksdale, the Court found that although drafted properly, a termination without cause provision in an employment contract was unenforceable because the termination with cause provision in the same contract provided for termination without notice in circumstances broader than those contemplated by the Employment Standards Act, 2000 (the “ESA”).

Recently, the Ontario Court of Appeal overturned the Rahman decision and echoed that the principles outlined in Waksdale are here to stay.

The Ontario Superior Court’s Decision

In Rahman, Ms. Rahman’s employment was terminated without cause after four years of employment. Based on the Waksdale decision, she argued that the termination without cause provision in her employment contract was unenforceable because the termination with cause provision permitted termination without notice in circumstances broader than those contemplated by the ESA.

In the Rahman decision, Justice Dunphy disagreed and distinguished Waksdale, finding that, among other reasons, the termination without cause provision in Ms. Rahman’s employment contract was enforceable and displaced her right to common law reasonable notice. In doing so, the Court held that there was no basis to apply a strict construction approach to the termination provisions in Ms. Rahman’s employment contract for several reasons, including that:

• Rahman received independent legal advice prior to signing the employment contract;
• Rahman was sophisticated, and there was no disparity in bargaining power; and
• the parties’ subjective intention was to comply with the ESA minimum standards.

Justice Dunphy also dismissed Ms. Rahman’s submission that the defendants, Cannon Design Architecture Inc. (“CDAI”), Cannon Design Ltd. and The Cannon Corporation, who are interrelated corporate parties, were Ms. Rahman’s common employers, and thus jointly and severally liable for any damages payable to her. The Court held that CDAI alone was Ms. Rahman’s employer.

Ms. Rahman exercised her right of appeal.

The Court of Appeal’s Decision

On appeal, the Court overturned the Rahman decision, finding that Justice Dunphy erred when he allowed considerations of the parties’ subjective intention to not contravene the ESA, together with Ms. Rahman’s level of sophistication and access to independent legal advice prior to signing the employment contract, to override the plain language in the termination provisions at issue.

In coming to its decision on this point, the Court reiterated that if one part of a termination provision in an employment contract violates the ESA, the remaining parts of the termination provision in the contract are invalid. As it did in Waksdale, the Court stated that it did not matter that the employer had not purported to terminate the employee for just cause. The just cause provision in the employment contract violated the ESA. And the invalidity of that provision rendered the other part of the termination provision, including the without cause portion, unenforceable.

Lastly, the Court set aside Justice Dunphy’s finding that CDAI alone was Ms. Rahman’s employer. Writing for the Court, Justice Gillese referred to the Court’s earlier decision in O’Reilly v. ClearMRI Solutions Ltd., which clarified that the test to determine whether corporations are common employers requires evidence of an intention to create an employer/employee contractual relationship between the individual employee and the related corporate parties.

Turning to the facts, the Court found that, based on the undisputed evidence, assessed objectively, it was “beyond question” that the respondents were Ms. Rahman’s common employers. The Court pointed to the following list of factors, and others, to show that the respondents were part of an interrelated corporate group, “CannonDesign,” that intended to create an employer/employee relationship with Ms. Rahman:

1. Rahman’s offer letter was printed on “CannonDesign” letterhead;
2. A human resources employee with The Cannon Corporation sent Ms. Rahman her offer letter and employment contract;
3. The Cannon Corporation played a significant role in establishing Ms. Rahman’s compensation and administering payment of her compensation;
4. Rahman’s annual bonus was determined by The Cannon Corporation and paid by way of shares in The Cannon Corporation;
5. CannonDesign required many of its offices to be interdependent and work in conjunction with one another;
6. CannonDesign’s website listed all employees, including Ms. Rahman;
7. The letter confirming Ms. Rahman’s termination of employment was on CannonDesign letterhead; and
8. The Executive Director of The Cannon Corporation was Ms. Rahman’s direct supervisor.

Takeaways for employers

This decision makes clear that Waksdale is here to stay and that Ontario courts will continue to review all components related to termination in employment agreements for strict compliance with the ESA. Employers should continue to be mindful of the words they put on paper, and seek legal advice to review and reconsider the language in their existing employment agreements and templates to address potential concerns.

Further, this decision may lead to an increase in the number of joint liability claims being advanced against employers in Ontario and their closely related companies. Employers should seek advice on their corporate arrangements to limit the potential for claims of this nature.