If an employment contract is negotiated as part of a larger commercial transaction, can the sophistication of the employee and the fact that he was represented by counsel during contract negotiations, be pointed to by the employer if the employee later alleges that the terms of the agreement are illegal?
In a rebuke (although not express) of Justice Dunphy’s decision in Rahman v. Cannon Design Architecture Inc., 2021 ONSC 5961, (released September 15, 2021,) Justice William Black in Steve Livshin, 2021 ONSC 6796 (CanLII), (released October 14, 2021,) held that if an employment agreement is illegal, then its unenforceable and the sophistication of the parties doesn’t matter.
Facts
The plaintiff, Livshin worked for many years in the health care industry.
In 2016, he founded a medical practice, specializing in the treatment of rheumatology, called “Involved Medicine”.
In 2018, there was a discussion between Livshin and a representative of “TCN”, which owns and operates a number of pain and cannabis clinics and related facilities across Canada. TCN, expressed an interest in acquiring the business of Involved Medicine through a purchase of shares.
As part of the overall transaction, it was proposed that Livshin stay on with TCN as an employee.
For purposes of these negotiations, including the purchase of shares and the Employment Agreement, the parties were represented by counsel.
As regards the Employment Agreement, TCN proposed a three-year term. Both this term, and various specific provisions of the Employment Agreement, were the subject of back and forth negotiations, including with respect to the payment(s) to which Livshin would be entitled in the event of termination of the Employment Agreement.
On March 27, 2020, owing to a substantial pandemic-driven decline in TCN’s business, Livshin received a letter from TCN advising that he was being temporarily laid-off from his employment with TCN (something which the Employment Agreement did not provide for). Livshin was told that the lay-off was temporary, and that his group employee benefits would continue during this temporary lay-off. He was provided with a Record of Employment so that he could apply for Employment Insurance benefits as well. Subsequently, with the passage of Ontario’s Infectious Disease Emergency Leave (by way of O. Reg. 288/20 under the ESA) Livshin’s temporary lay-off was converted to a deemed Infectious Disease Emergency Leave with retroactive effect to March 27, 2020, the first day of the temporary lay-off.
On August 31, 2020, Livshin received a further letter, advising that his employment with TCN was being terminated, effective immediately. Between the lay-off letter of March 27, 2020 and the termination letter of August 31, 2020, Livshin did no further work for TCN and was paid no further amounts by way of salary or otherwise.
In connection with the termination, TCN presented a letter to Livshin advising of TCN’s position that the Employment Agreement entitled Livshin to 24 weeks of termination pay in lieu of notice if he executed a full and final release in favour of TCN. Livshin declined to sign a release, and accordingly, based on its interpretation of the Employment Agreement, TCN paid Livshin 2 weeks of termination pay.
Livshin sued, claiming wrongful dismissal. The cut and thrust of his argument was that the termination provision in his agreement was void ab initio because it ostensibly allowed TCN to terminate his employment “for cause” without providing him with his statutory entitlements.
TCN defended the claim by advancing the argument that even if the termination clause at issue violates the ESA, which it denied, the premise underlying the line of authorities in question, namely that there is typically an imbalance of power between employers and employees such that employment agreements must be interpreted with that power imbalance in mind, does not arise in this case so that there was no need for the court to “protect” the plaintiff here.
Decision of the Ontario Superior Court
In finding against the employer, notwithstanding its counsel’s able arguments, Justice Black providing the following reasons for decision:
[38] Both of [Fred Deely and Waksdale] start from the premise that inherent in the employer-employee relationship is an imbalance of power, that in those circumstances an employee may not appreciate the distinction between common law cause on the one hand and O. Reg. 288/01 under the ESA on the other, and that therefore provisions like s. 6(c) risk an employee missing out on pay and benefits to which he or she is statutorily entitled. Consistent with this concern, the bottom line from these cases is that employment agreement provisions should clearly comply with the ESA, and that if they do not, they are invalidated.
…
[41] In my view, the defendant’s most powerful argument, and frankly the one on which the defendant’s factum and oral submissions focused, is about the impact, on the analysis set out above, of the fact that in this case two sophisticated parties, represented by counsel, negotiated the agreement in issue in the context of and alongside the Share Purchase.
[42] The defendant argues that the premise about imbalance of power, from which the Fred Deeley and Waksdale authorities proceed, is simply not present in this case.
[43] TCN relies in that regard on the Supreme Court of Canada’s decision in Payette v. Guay inc., 2013 SCC 45, [2013] 3 S.C.R. 95. In that case, dealing with the enforcement of restrictive covenants, the Court, at paras. 36-37, said:
The application of different rules in the context of a contract of employment is a response to the imbalance of power that generally characterizes the employer‑employee relationship when an individual contract of employment is negotiated, and its purpose is to protect the employee.These rules have no equivalent in the commercial context, since an imbalance of power is not presumed to exist in a vendor-purchaser relationship.…
At para. 39, the Court continued:
Thus, the common law rules for restrictive covenants relating to employment do not apply with the same rigor or intensity where the obligations are assumed in the context of a commercial contract. This is especially true where the evidence shows that the parties negotiated on equal terms and were advised by competent professionals, and that the contract does not create an imbalance between them.[44] The defendant argues that the same holds true here. That is, given that the Employment Agreement was negotiated in the context of a commercial transaction with lawyers representing both (sophisticated) parties, the concerns motivating the Fred Deeley and Waksdale lines of authority are not present, and there is no need for the court to lean in favour of the employee’s position or to insist on strict and clear compliance with the ESA (in the event I find the language of s. 6(c) problematic).
[45] While, again, [counsel] argued the position forcefully, I am not persuaded that the considerations laid out in Payette apply directly to the facts before me.
…
[53] As such, and notwithstanding the relative sophistication of the plaintiff and his representation by counsel in the Share Purchase, in my view there is no compelling reason why TCN should be permitted to rely on termination provisions that do not comply with the ESA.
[54] In Fred Deeley, at para. 28, Justice Laskin, noting the presumed power imbalance, cited some general principles to be applied in this setting, including:
- The ESA is remedial legislation, intended to protect the interests of employees. Courts should thus favour an interpretation of the ESA that “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible” (citing Machtinger v. HOJ Industies Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, at p. 1003);
- Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA. If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship (citing Machtinger, at p. 1004);
- A termination clause will rebut the presumption of reasonable notice only if its wording is clear. Employees should know at the beginning of their employment what their entitlement will be at the end of their employment (citing Machtinger, at p. 998);
- Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee (citing Ceccol v. Ontario Gymnastics Federation (2001), 2001 CanLII 8589 (ON CA), 149 O.A.C. 315 (C.A.); Family Counselling Centre of Sault Ste. Marie and District (2001), 2001 CanLII 4698 (ON CA), 151 O.A.C. 35 (C.A.)).
[55] While, as noted, I appreciate that these principles start from a presumed power imbalance, they strike me as providing guidance which, generally speaking, is not onerous for employers to follow.
[56] Looking to Payette, if there is some commercial imperative driving the need for a particular provision, linked to, and necessitated by, a commercial transaction out of which the employment relationship arises, and if the reason for that provision is primarily related to the commercial transaction, then it may be that there is more latitude for a provision that is on its face at odds with protective legislation. However, I expect that this will rarely be the case and, indeed, am hard‑pressed to come up with examples which would permit a breach of the ESA.
[57] In any event, there are no such imperatives here. While Livshin may be more sophisticated than many employees, and notwithstanding that he was represented by counsel, I can see no reason why the clause at issue had to be drafted in a way that on its face contravenes the ESA. Further, in my view the goal that employers be encouraged to draft clauses that comply with the ESA trumps the suggestion that Livshin may have been better able than many or most employees to recognize the potential peril.
[58] Again, there is no suggestion by TCN that s. 6(c) had to be drafted in the way it was to protect or preserve some aspect of the related Share Purchase, and no other imperative offered to explain the drafting decision. TCN’s argument that Livshin’s representation by counsel should result in him being taken to understand the potential pitfalls of the Employment Agreement at issue here might be turned back on TCN to suggest that an employer, represented by counsel, particularly in the period after the Court of Appeal’s decision in Fred Deeley, ought to know better than to draft a termination provision that fails to comply with the ESA.
In the end the court found the contractual termination provision was not dispositive of his entitlement
Commentary
As noted at the outset the Livshin decision is about 180* away from Justice Dunphy’s decision in Rahman, about which I blogged in my post Hope for Ontario's Employer Bar: The ONSC's Decision in Rahman v. Cannon Design Architecture Inc..
In Rahman, the same court made the following pronouncement:
[26] There is no basis to apply a strict or even adverse construction approach to the termination provisions of this employment contract in the context of this case where… the termination provisions were the object of specific negotiation with the benefit of time and independent legal advice between reasonably sophisticated parties with neither compulsion nor marked disparity in bargaining power;
Justice Dunphy also made a complete opposite finding with respect to the interpretation of “just cause” writing, “There is no basis for me to infer in this contract an intention to characterize non-wilful misconduct as amounting to “just cause for summary dismissal” and I cannot in fairness do so. If none of the parties to the contract at its inception – having turned their minds to the very subject of ESA minimum standards applicable on termination and their priority – took objection to the general “just cause for summary dismissal” language used it would be entirely illogical to infer nevertheless an intent to contract out of well-known and long-standing minimum standards in the jurisdiction in which they were operating. The language employed in no way requires such an illogical interpretation and there is no evidence of an existing non-conforming policy.” Set those words against what Justice Black writes in Livshin, ““Just cause” is not defined in the Employment Agreement but, typically, as held in various cases, the phrase is understood as a common law notion connoting a basis, from an employee’s performance or conduct, justifying termination of the employee’s employment without the need for advance notice. Nothing in the Employment Agreement suggests any other interpretation of “just cause” here.”
What then to make of these polar opposite decisions?
With respect to the issue of the sophistication of the parties and whether they were represented by counsel, Justice Black’s analysis and decision holds greater appeal. The flipside to the argument that the employee had counsel, and therefore should have negotiated a better deal, was that the employer also had counsel and therefore had the opportunity to draft language that would not have violated the ESA.
With respect to the interpretation of just cause, however, I agree with Justice Dunphy. There continues to be considerable confusion in the law as to what “cause” or “just cause” actually mean in the non-unionized, provincially regulated world of Ontario employment law.
As Justice Black notes in his reasons for decision in Livshin, “Just cause is, typically, as held in various cases, the phrase is understood as a common law notion connoting a basis, from an employee’s performance or conduct, justifying termination of the employee’s employment without the need for advance notice.” Put another way, judges have historically used the phrase “just cause” to mean “wilful misconduct.”
Before the Court of Appeal’s decision in Waksdale almost everyone would have agreed that if an employer had “cause” to terminate an employment agreement, then that meant it could terminate the employee’s employment without being required to provide that employee with notice of termination, severance, etc. That is what everyone understood. Yes, I get that there is a difference between cause and wilful misconduct and that they are different standards, but, respectfully, the judiciary has done no one any favours here by continuously confusing the two standards in their reasons for decision
Takeaways for Employers
The takeaway for employers is that employment agreements require a level of drafting that can only be provided by someone who operates in the employment law realm. Employers likely cannot rely on the fact that the employee is sophisticated, represented by counsel, or otherwise to defeat arguments that their agreements violate the strictures of Ontario’s employment standards legislation.
Takeaways for Employees
The takeaway for employees is that it almost always pays to have your employment contract reviewed by a lawyer after the termination of your employment. Even if you agreed to a termination provision, and even if you received legal advice with respect to it, if the language is illegal, then the court may not give effect to it when it really matters.
Contact Me
If you are an employer and you have a question about whether the wording of your employment contract would survive judicial scrutiny, or if think it might be time for a review of your employment agreements, or you know it’s time for someone to draft a new set of agreements for you, then I can help.
If you are an employee and you have questions about your employment agreement and whether you might now be owed more for severance than what your employer is offering, I can help with that too.
I can be reached by email at sbawden@kellysantini.com or by phone at 613.238.6321 x233.
Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP. For 2.5 years he was in-house legal counsel providing employment law advice to one of Canada’s largest corporations. He has also been a part-time professor at Algonquin College teaching Trial Advocacy for Paralegals and Small Claims Court Practice.
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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.
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