In Perretta v. Rand A Technology Corporation, 2021 ONSC 2111, Ontario’s Superior Court of Justice ordered an employer to pay an employee damages for reasonable notice at common law when it decided the employer repudiated its employment agreement upon failing to comply with one of its termination provisions.  In addition, the court followed the recent Ontario Court of Appeal (OCA) decision in Waksdale v. Swegon North America Inc., 2020 ONCA 391 (discussed in detail here), when it determined that because one termination provision in the employment contract was contrary to the Employment Standards Act, 2000 (ESA), all of its termination provisions were unenforceable. 

Background

The employee entered into an employment agreement with her employer (Contract).  Its termination without cause provision provided:

Termination Without Cause – We may terminate your employment in our sole discretion, without cause, by providing you with two weeks of notice or pay in lieu of notice (or some combination thereof), plus the minimum notice or pay in lieu of notice (or some combination thereof) and severance pay (if any) then required by the ESA. [The employer] will also continue your Benefits to the extent and for the minimum period required by the ESA.

The termination with cause provision in the Contract provided:

Termination With Cause – We may terminate your employment for just cause at any time without notice, pay in lieu of notice, severance pay, or other liability, subject to the ESA. For the purposes of this Agreement, “just cause” means just cause as that term is understood under the common law and includes, but is not limited to: [list of Eleven Categories of Just Cause]

When the employee’s job was terminated without cause, the employer refused to pay her two weeks’ pay unless she executed a full and final release (Release), which it presented to her as a part of an “Enhanced Severance” offer.  The employee challenged the employer’s position, and the employer reiterated its demand.  The employee’s lawyer then advised the employer that it was in breach of the Contract.  The employer’s lawyer responded with an apology on behalf of the employer, and the employer transferred to the employee two weeks’ pay and the monetary value of her ESA entitlements.

The employee argued that the employer repudiated the Contract, and that the termination provisions in the Contract were unenforceable because they contravened the ESA.  She brought a motion for summary judgment seeking common law damages for wrongful dismissal, without the limitation imposed by the termination without cause provision.  

Decision

Employer Repudiated Contract

The court explained that the test for repudiation of a contract is:

…whether, considering surrounding circumstances, including the nature of the contract, the motives which prompted the purported breach, and the impact of the party’s conduct on the other party, a reasonable person would conclude that the breaching party no longer intends to be bound by the contract with the result that the innocent party would be deprived of substantially the whole benefit of the contract. A party can repudiate a contract without subjectively intending to do so, because the assessment is made objectively.  (para. 20)

After conducting an objective assessment of the following facts, the court concluded the test was satisfied:

• The employer demanded the employee execute the Release four times in the termination letter, and clearly stated it would not pay the employee two weeks’ pay until she did so;
• The Release did not contain only a release of any cause of action the employee had against the employer; it also contained additional detailed substantive terms, demonstrating that since the employer “took time and purpose to prepare this detailed document,” its demand for the Release “was not a casual or accidental slip” (para 27);
• The employer twice demanded the employee execute the Release in exchange for her two weeks’ pay, removing the possibility that the employer’s initial demand “was the product of momentary inattention” (para. 28); and
• The employer’s refusal to pay the two weeks’ salary deprived the employee of substantially the whole monetary benefit of the Contract available to her upon termination apart from the statutory benefits.

The court refused to accept that the lawyer’s apology on behalf of the employer and the employer’s post-breach payment of the amounts owed cured the employer’s breach, as to do so would leave employers little incentive to comply with termination provisions. 

Termination Provisions Unenforceable  

After determining the Contract was repudiated, the court was not technically required to decide whether the termination provisions were enforceable. It decided, however, that it would consider the issue “for completeness of analysis” (para. 42).

The court began its analysis by considering the enforceability of the Contract’s termination with cause provision.  It focused on three of the eleven categories of just cause set out below, which it referred to as the “Offending Categories”:

• “a material breach of this Agreement or our employment policies”;
• “unacceptable performance standards”; and
• “repeated, unwarranted lateness, absenteeism or failure to report for work.”

The court reasoned that the Offending Categories breached the ESA because they contravened Termination and Severance of Employment, O Reg 288/01:

…they permit dismissal without notice of termination or termination or severance pay in circumstances where the employee is not “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer” (para. 45)

Noting that in Waksdale the OCA held that an employment contract must be interpreted as a whole rather than on a piecemeal basis, and that termination provisions that are illegal in whole or part will not be enforced, the court concluded:

…if the Termination With Cause Provision is unlawful as contrary to the ESA, then all the termination provisions in the [Contract] are unenforceable.  It is irrelevant that the [employer] did not rely on the Termination With Cause Provision … Its illegality would render unenforceable all termination provisions in the [Contract], including the Termination Without Cause Provision on which [the employer] relies.  (para. 47)

The court pointed to the ambiguity in the termination with cause provision:  although it stated in its first sentence that it was subject to the ESA, “the inclusion of the Offending Categories ‘flies in the face’ of compliance with the ESA.” (para. 56).  As judicial precedent required the court to resolve ambiguity in favour of the employee, it held that the termination provision contravened the ESA and was invalid.    

Finally, the court rejected the employer’s argument that the ambiguity could be saved by the saving provision, which provided that when the employee’s employment contract resulted in a contravention of the ESA, the employer would comply with the ESA.  The court noted that the purpose of a saving provision is to safeguard against future changes to the ESA, rather than to save a contract that did not comply with the ESA from the outset. 

Reasonable Notice & Mitigation

After reviewing relevant case law and the established principles set out in Bardal v. Globe & Mail Ltd.(1960), 1960 CanLII 294 (ON SC), 1960 CanLII 294 (ON SC), 24 D.L.R. (2d) 140 for determining reasonable notice (character of employment, length of employee’s service, employee’s age, and availability of similar employment, having regard to the employee’s experience, training and qualifications), the court awarded the employee six months’ notice, i.e., six months of base salary, commission income, and benefits, less the amount already paid by the employer. The court concluded that the employer failed to establish that the employee did not act reasonably in mitigating her losses. 

Bottom Line for Employers

Perretta v. Rand reminds employers that they must ensure their familiarity with their obligations in the termination provisions in their employment contracts and be careful not to breach them.  An employer’s failure to act in accordance with its own termination provisions can expose  it to liability for damages for common law reasonable notice.  Accordingly, employers are encouraged to seek the support of employment law counsel to help them understand their termination provision obligations. 

Perretta v. Rand  also reminds employers that courts will resolve ambiguity in termination provisions in favour of the employee, and furthermore, that ambiguity in a termination provision will not be saved by a saving provision.  The purpose of a saving provision is not to save a termination provision that did not comply with the ESA from the outset, but rather to protect against changes to the ESA made after a contract is concluded.  Accordingly, employers are encouraged to seek the support of employment counsel in drafting termination provisions that are clear and unambiguous.