



COURT OF APPEAL FOR ONTARIO

CITATION: North v. Metaswitch Networks Corporation, 2017 ONCA
    790

DATE: 20171016

DOCKET: C62624

Feldman, Sharpe and Roberts JJ.A.

BETWEEN

Doug North

Applicant (Appellant)

and

Metaswitch Networks Corporation

Respondent (Respondent)

Ben Hahn, for the appellant

Tracy Kay and Carrington Hickey, for the respondent

Heard: March 27, 2017

On appeal from the judgment of Justice Meredith Donohue
    of the Superior Court of Justice, dated August 3, 2016.

Feldman J.A.:

[1]

Doug Norths employment with Metaswitch Networks Corporation was governed
    by a written employment contract (the Agreement). When Norths employment was
    terminated without cause, a dispute arose as to whether he was entitled to be
    paid in accordance with the Agreement, or based on common law reasonable
    notice.

[2]

The Agreement contained a termination clause that amounted to
    contracting out of an employment standard mandated by the
Employment
    Standards Act,
2000
,
S.O. 2000, c. 41 (the ESA). However, the Agreement also contained a
    severability clause. The issue before the application judge and on this appeal
    is the interpretation and application of the two clauses in light of s. 5 of
    the ESA, which prohibits employers and employees from waiving or contracting
    out of any employment standard prescribed by the ESA, except to provide a greater
    benefit to the employee.

[3]

The application judge used the severability clause to excise what she
    found to be the offending part of the termination clause. For the reasons that
    follow, I would set aside the decision of the application judge and find that
    North is entitled to receive termination pay based on common law pay in lieu of
    reasonable notice.

Facts

[4]

The appellant was employed from November 2012 to March 2016 with the
    respondent, pursuant to the Agreement. His earnings consisted of salary plus
    commission.

[5]

His employment was terminated in accordance with paragraph 9(c) of the Agreement,
    under Termination of Employment, the relevant part of which provides:

9. Termination of Employment

(c) Without Cause  The Company may terminate your
    employment at any time in its sole discretion for any reason, without cause,
    upon by [sic] providing you with notice and severance, if applicable, in
    accordance with the provisions of the Ontario
Employment Standards Act
(the 
Act
). In addition, the Company will continue to pay its share all
    [sic] of your employee benefits, if any, and only for that period required by
    the Act.

The reference to notice in paragraphs 9(b) and (c) can, at the
    Companys option, be satisfied by our provision to you of pay in lieu of such
    notice. The decision to provide actual notice or pay in lieu, or any
    combination thereof, shall be in the sole discretion of the Company. All pay in
    lieu of notice will be subject to all required tax withholdings and statutory
    deductions.

In the event of the termination of your employment, any
    payments owing to you shall be based on your Base Salary, as defined in the
    Agreement.

[6]

The appellant took the position that this part of the Agreement was void
    under s. 5(1) of the ESA, because the sentence that provides that payments are
    to be based on your Base Salary contravened the ESA by excluding his
    commission. Therefore, he was entitled to receive termination compensation
    based on common law pay in lieu of reasonable notice.

[7]

The respondents position was that if the termination clause was illegal
    because of the one offending sentence, then that sentence should be excised from
    the Agreement, using the severability clause contained in para. 17(a) which
    provides:

17. General Provisions

(a) If any part of the Agreement is found to be illegal or
    otherwise unenforceable by any court of competent jurisdiction, that part shall
    be severed from this Agreement and the rest of the Agreements provisions shall
    remain in full force and effect.

[8]

That would leave the balance of para. 9 in force, and the appellant
    would be paid termination pay calculated in accordance with the ESA.

[9]

The appellant sought to have the issue of the applicability and effect
    of the severability clause determined by the court on an application under Rule
    14 of the
Rules of Civil Procedure
, R.R.O. 1990, Reg. 194, where the
    determination of rights depends on the interpretation of a contract and there
    are unlikely to be any material facts in dispute.

The findings of the application judge

[10]

The
    application judge accepted that the sentence in the termination clause, para. 9
    of the Agreement, that reads: [i]n the event of the termination of your
    employment, any payments owing to you shall be based on your Base Salary, as
    defined in the Agreement, had the effect of excluding payment of commission to
    which the appellant was entitled, and therefore contravened the ESA.

[11]

Employment standard is defined in s. 1(1) of the ESA as a
    requirement or prohibition under this Act that applies to an employer for the
    benefit of an employee.
Sections 57, 60 and 61 set out employment
    standards in relation to termination of employment. Section 57 of the ESA
    stipulates minimum notice periods for termination. Section 60 provides that
    during such a notice period, wages cannot be reduced and employees are entitled
    to their regular wages. Section 61 allows an employer to terminate the
    employment of an employee without notice, so long as the employer makes a lump
    sum payment equivalent to the amount that would have been received under s. 60
    (i.e., based on regular wages) and continues to make benefit plan
    contributions. The definition of regular wages includes wages, which are
    defined broadly in the ESA, in s. 1(1), as:

(a) monetary remuneration payable by an employer
    to an employee under the terms of an employment contract, oral or written,
    express or implied,

(b) any payment required to be made by an
    employer to an employee under this Act, and

(c) any allowances for room or board under an
    employment contract or prescribed allowances[.]

[12]

The
    definition goes on to list certain exclusions that are not relevant in this
    case. Wages have been held to include commissions: see Kimberly A. Parry and
    David A. Ryan,
Employment Standards Handbook
, 3d ed. (Toronto: Thomson
    Reuters, 2017) vol. 1, at p. 1-29; and
Paquette c. Quadraspec Inc.
,
    2014 ONCS 2431, 121 O.R. (3d) 765, at para. 27. By excluding commissions, the
    employer therefore contravened the employment standard of ss. 60 and 61. In
    oral argument before this court, the respondent did not dispute this
    illegality.

[13]

The
    application judge addressed the severability clause and found that para. 17(a)
    expressed the intention of the parties that any illegal or unenforceable parts
    were to be severed to allow the rest of the agreement to stand. She then
    recited the portion of the termination clause, para. 9(c), which states that
    notice and severance, if applicable, were to be provided in accordance with
    the provisions of the Ontario
Employment Standards Act
. She concluded
    that the parties intention was to comply with the ESA.

[14]

In
    interpreting and giving effect to the severability clause, the application
    judge referred to the reasoning of Dunphy J. in
Oudin v. Centre Francophone
    de Toronto, Inc.
, 2015 ONSC 6494, 27 C.C.E.L. (4th) 86, affd 2016 ONCA
    514, 34 C.C.E.L. (4th) 271, leave to appeal to SCC refused, [2016] S.C.C.A. No.
    391, where, using a severability provision, he excised from a termination provision
    one reason among a list of reasons for dismissal without pay, stating, at para.
    41, that [t]he excision of the offending reason from the list does no violence
    to the integrity of the remainder of s. 4 which contains a list of other
    unrelated grounds for termination.

[15]

The
    application judge found that the same reasoning would apply to the Agreement:
    the illegal clause limiting the pay upon termination to be based on base salary
    only could be removed in its entirety pursuant to the para. 17(a) severability
    clause. The parties would be left with [para.] 9(c) as to what payments would
    be owing. She was satisfied that the term any part in para. 17(a) was not
    ambiguous and could apply to the offending sentence. She rejected the argument
    that the severability clause was void as a result of s. 5(1) of the ESA.

Issues

[16]

The
    issues on this appeal are:

1) Did the application judge err in law by using the
    severability clause of the Agreement to save the termination clause that
    contravened the ESA?

2) Did the application judge err in law by failing to find that
    the severability clause had no application to a clause of the Agreement that
    was rendered void by s. 5(1) of the ESA?

Analysis

(1)

Did the application judge err in law by using the severability clause of
    the Agreement to save the termination clause that contravened the ESA?

(a)

The employment law framework

[17]

When
    deciding this case, the application judge did not have the benefit of this
    courts recent decision in
Wood v. Fred Deeley Imports Ltd.
, 2017 ONCA
    158, 134 O.R. (3d) 481, on the issue of the interpretation and treatment of
    termination clauses in an employment contract. While deference is owed to the
    application judge on issues of contractual interpretation, no deference is owed
    where there is an extricable error of law: see
Wood
, at para. 43; and
Ledcor
    Construction Ltd. v. Northbridge Indemnity Insurance Co.
, 2016 SCC 37,
    [2016] 2 S.C.R. 23, at paras. 21, 36.

[18]

In
Wood
, Laskin J.A. set out the principles that govern the payment owed
    to an Ontario employee whose employment is terminated without cause. He
    summarized the law as follows, beginning at paras. 15-16:

At common law, an employee hired for an indefinite period can
    be dismissed without cause, but only if the employer gives the employee
    reasonable notice. In
Machtinger
v. HOJ Industries Ltd.
, [1992] 1
    S.C.R. 986, at p. 998, the Supreme Court characterized the common law principle
    of termination of employment on reasonable notice as a presumption, rebuttable
    if the contract of employment clearly specifies some other period of notice.

Ontario employers and employees can rebut the presumption of
    reasonable notice by agreeing to a different notice period. But their agreement
    will be enforceable only if it complies with the minimum employment standards
    in the ESA. If it does not do so, then the presumption is not rebutted, and the
    employee is entitled to reasonable notice of termination.

[19]

And
    continuing at paras. 25-28:

The question of the enforceability of the termination clause
    turns on the wording of the clause, the purpose and language of the ESA, and
    the jurisprudence on interpreting employment agreements. That jurisprudence is
    now well-established. I will summarize it briefly.

In general, courts interpret employment agreements differently
    from other commercial agreements. They do so mainly because of the importance
    of employment in a persons life. As Dickson C.J.C. said in an oft-quoted
    passage:

Work is one of the most fundamental aspects in a persons
    life, providing the individual with a means of financial support and, as
    importantly, a contributory role in society. A persons employment is an
    essential component of his or her sense of identity, self-worth and emotional
    well-being.

As important as employment itself is the way a persons
    employment is terminated. It is on termination of employment that a person is
    most vulnerable and thus is most in need of protection.

The importance of employment and the vulnerability of employees
    when their employment is terminated give rise to a number of considerations
    relevant to the interpretation and enforceability of a termination clause:

·

When employment agreements are made, usually employees have less
    bargaining power than employers. Employees rarely have enough information or
    leverage to bargain with employers on an equal footing.

·

Many employees are likely unfamiliar with the employment
    standards in the ESA and the obligations the statute imposes on employers.
    These employees may not seek to challenge unlawful termination clauses.

·

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, over an
    interpretation that does not do so.

·

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.

·

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.

·

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. [Citations omitted.]

[20]

Section
    5 of the ESA prohibits employers and employees from waiving or contracting out
    of any of the employment standards prescribed in the ESA, except to provide a
    greater benefit to the employee. Any such contracting out is void. The text of
    s. 5 is as follows:

5. (1) Subject to subsection (2), no employer or agent of an
    employer and no employee or agent of an employee shall contract out of or waive
    an employment standard and any such contracting out or waiver is void.

(2) If one or more provisions in an employment contract or in
    another Act that directly relate to the same subject matter as an employment
    standard provide a greater benefit to an employee than the employment standard,
    the provision or provisions in the contract or Act apply and the employment
    standard does not apply.

[21]

Most
    importantly, in
Wood
, at para. 21, the court explained the effect of
    the principles established by the Supreme Court in
Machtinger
regarding
    the consequences of s. 5(1) of the ESA:

Contracting out of even one of the employment standards and not
    substituting a greater benefit would render the termination clause void and
    thus unenforceable, in which case [the employee] would be entitled to
    reasonable notice of termination of her employment at common law.

[22]

This
    interpretation of the operation and effect of s. 5(1) of the ESA explains how a
    court is to approach the interpretation of termination clauses that waive or
    contract out of one employment standard, but comply with others.

(b)

Application of the principles

[23]

In
    my view, the application judge erred in her approach to the interpretation and
    application of the severability clause. It is convenient to restate para. 17(a)
    of the agreement here for ease of reference:

17. General Provisions

(a) If any part of the Agreement is found to be illegal or
    otherwise unenforceable by any court of competent jurisdiction, that part shall
    be severed from this Agreement and the rest of the Agreements provisions shall
    remain in full force and effect.

[24]

The
    severability clause directs that the part of the agreement that is to be
    severed is the part that a court would find to be illegal. The rule from
Wood
,
    following
Machtinger
, is that where a termination clause contracts out
    of one employment standard, the court is to find the entire termination clause
    to be void, in accordance with s. 5(1) of the ESA. It is an error in law to
    merely void the offending portion and leave the rest of the termination clause
    to be enforced.

[25]

As
    a result, the application judge erred in law by severing only the offending
    sentence that referred to using only base salary to calculate termination pay
    in lieu of notice, rather than the entire termination clause. Para. 17(a)
    requires that the part to be severed is the part that a court would find to be
    illegal, which must be the entire termination clause.

[26]

Because
    of the conclusion I have reached based on the meaning and application of para.
    17(a), there is no need in this case to address the Supreme Court decision in
Shafron
    v. KRG Insurance Brokers (Western) Inc.
, 2009 SCC 6, [2009] 1 S.C.R. 157, referred
    to by the appellant, and to what extent the rules regarding blue pencil and
    notional severance may apply in the context of the severability clause drafted
    by the parties.

(2)

Did the application judge err in law by failing to find that the
    severability clause had no application to a clause of the Agreement that was
    rendered void by s. 5(1) of the ESA?

[27]

The
    appellant also argued, in the alternative, that the effect of s. 5(1) of the
    ESA is to make the severability clause void. The application judge rejected
    that submission.

[28]

While
    I agree with the application judge that the severability clause is not rendered
    void by s. 5(1), I would frame the issue differently. The issue is not whether
    the severability clause is void, but whether it can have any application on the
    termination clause, if that clause is void as a result of s. 5(1).

(a)

Consequences of a voided clause, absent a severability clause

[29]

Section
    5(1) prohibits contracting out of or waiving an employment standard, and
    provides that any such contracting out or waiver is void. An employment standard
    is defined in s. 1(1) as: a requirement or prohibition under this Act that
    applies to an employer for the benefit of an employee.

[30]

The
    result is that an offending termination clause that is void has no application
    to oust the common law, which again applies, requiring pay in lieu of
    reasonable notice. As discussed above, in
Wood
, at para. 21, this
    court explained that where a termination clause contains even one instance of
    contracting out of an ESA employment standard, the clause is void.

[31]

In
Machtinger
, Iacobucci J. gave a number of policy reasons for finding
    that where there is contracting out of an employment standard within a
    termination clause, the effect is to void the entire clause (resulting in
    entitlement to reasonable notice), and not just the removal of the impugned
    clause (resulting in entitlement to the statutory minimum termination pay
    provisions).

[32]

He
    stated at p. 1003, that in light of the objective of the ESA to protect the
    interests of employees:

[A]n interpretation of the [ESA] which encourages employers to
    comply with the minimum requirements of the [ESA], and so extends its
    protections to as many employees as possible, is to be favoured over one that
    does not.

[33]

He
    continued at p. 1004:

If the only sanction which employers potentially face for
    failure to comply with the minimum notice periods prescribed by the [ESA] is an
    order that they minimally comply with the [ESA], employers will have little
    incentive to make contracts with their employees that comply with the [ESA].

[34]

And
    as many employees are not aware of their legal rights or will not go to the
    trouble or expense of trying to have the contract set aside in court, they will
    accept the illegality: see
Machtinger
, at p. 1004.

[35]

Nor
    would it be a hardship for the employer to draft a contract that complies with
    or accounts for potential changes in the ESA. As Iacobucci J. stated, at pp.
    1004-1005:

Absent considerations of unconscionability, an employer can
    readily make contracts with his or her employees which referentially
    incorporate the minimum notice periods set out in the [ESA] or otherwise take
    into account later changes to the [ESA] or to the employees' notice entitlement
    under the [ESA].

[36]

Justice
    Iacobucci concluded his analysis by observing, at p. 1005:

Given that the employer has attempted, whether deliberately or
    not, to frustrate the intention of the legislature, it would indeed be perverse
    to allow the employer to avail itself of legislative provisions intended to
    protect employees, so as to deny the employees their common law right to
    reasonable notice.

[37]

In
    my view, these same policy considerations should inform the approach to be
    taken when considering the operation of s. 5(1), where an employment contract
    contains a severability clause.

(b)

Approaches to interpreting and applying a severability clause

[38]

When
    a severability clause is introduced into the contract, the issue is whether:
    (i) the severability clause can be used to remove the illegality in the
    termination clause; or (ii) because the termination clause as drafted is void
    as a result of s. 5(1), there is nothing on which the severability clause can
    act.

(i)

First approach

[39]

In
Oudin
, the motion judge relied on the wording of the specific severability
    provision in the employment contract that directed modification only to the
    extent necessary to comply with the law: see
Oudin
, at paras. 35, 40.
    The motion judge found that this established the clear intention of the
    parties: see
Oudin
, at para. 42. Similarly in
Miller v. Convergys
    CMG Canada Limited Partnership
, 2014 BCCA 311, 16 C.C.E.L. (4th) 49, leave
    to appeal to SCC refused, [2014] S.C.C.A No. 424, the court stated at para. 42:

Where the parties anticipated the possibility of severance and
    chose contractual language to govern this eventuality, severability is not just
    a remedial question. Before turning to remedy, the starting point must be to
    give effect to what the parties reasonably intended if a provision of the
    contract is found unenforceable by reason of illegality.

[40]

The
    problem with this approach is that, to the extent that it effectively rewrites
    or reads down the offending provisions, it has the very effect referred to by
    Iacobucci J. in
Machtinger
 employers will be incentivized to contract
    out of the ESA but include a severability clause to save the offending provision
    in the event that an employee has the time and money to challenge the contract
    in court. Similar concerns were recognized by this court in
2176693 Ontario
    Ltd. v. Cora Franchise Group Inc.
, 2015 ONCA 152, 124 O.R. (3d) 776, where
    the court declined to order severance of an illegal clause in a franchise
    agreement because, if the only consequence to a franchisor is that the illegal
    clause is read down to make it legal, franchisors would be encouraged to draft
    illegal contracts.

(ii)

Second approach

[41]

The
    other approach is to first assess the termination clause to see whether there
    is any contracting out of an employment standard. If there is, then the
    termination clause is void, and there is nothing to which the severability
    clause can be applied. In that way, the severability clause is not void, but it
    is inoperative where the agreement contracts out of or waives an employment
    standard.

[42]

In
    my view, this approach is the one that is consistent with the intent of the ESA
    and the Supreme Court decision in
Machtinger
. Nor does it do any
    injustice to the contractual interpretation principle of ascertaining the intention
    of the parties. Because the termination clause is void, it cannot be used as
    evidence of the parties intentions to comply with the ESA: see
Machtinger
,
    at p. 1001.

[43]

This
    approach also causes no disadvantage to employers, who, as noted by Iacobucci
    J., are free to make a legal contract that limits an employees rights on
    termination to the standards set by the ESA.

[44]

As
    noted above, this conclusion does not make the severability clause void. It
    continues to have application to the rest of the agreement. However, it cannot
    have any effect on clauses of the contract that have been made void by statute.
    Those terms are null and void for all purposes and cannot be rewritten, read
    down or interpreted through the application of a severability clause to provide
    for the minimum standard imposed by the ESA.

[45]

I
    would therefore hold that s. 5(1) of the ESA makes the severability clause,
    para. 17(a), inoperative on the termination clause, which contracts out of an
    employment standard.

[46]

This
    result may appear to be inconsistent with this courts dismissal of the appeal
    in
Oudin
. The application judge found the motion judges reasons in
Oudin
to be analogous. However, the courts in
Oudin
also did not have the
    benefit of this courts subsequent decision in
Wood
. Further, the
    issue of the applicability of the severability provision in light of s. 5(1) of
    the ESA was not discussed in the endorsement as the basis of the appeal. Rather,
    the basis of the appeal was primarily focused on the correctness of the motion
    judges determination that the termination provisions respecting notice did not
    offend the ESA. Therefore, this courts endorsement in
Oudin

should
    not be viewed as supporting a broad, overarching principle regarding the motion
    judges application of the severability provision in that case: see
R. v.
    Timminco Limited
(2001), 54 O.R. (3d) 21 (C.A.), at para. 36; and
R.
    v. Singh
, 2014 ONCA 293, 120 O.R. (3d) 76, at para. 12.

Result

[47]

I
    would allow the appeal with costs, set aside the decision of the application
    judge, and order that the appellant is entitled to receive termination pay
    based on common law reasonable notice. I would fix the costs of the appeal at
    $17,000 inclusive of HST and disbursements, and the costs of the application at
    $8,000 inclusive of disbursements and HST.

Released: K.F. October 16, 2017

K. Feldman J.A.

I agree. Robert J. Sharpe J.A

I agree. L.B. Roberts J.A.


