June 24, 2022
by Israel Foulon Wong LLP

Summary

The Superior Court of Justice of Ontario recently issued its reasons in Gracias v. Dr. David Walt Dentistry, 2022 ONSC 2967 (“Gracias”), which was a summary judgement motion in a wrongful dismissal action. In these reasons, the Court reaffirmed the decision of Waksdale v Swegon North America Inc., 2020 ONCA 391 (“Waksdale”, as previously discussed in our June 24, 2020 E-Bulletin, and our February 8, 2021 E-Bulletin).

Though Waksdale has been applied and affirmed numerous times since it was released, the importance of the Gracias decision is in its particular application of Waksdale.  In Gracias, the Court relied on language relating to termination “for cause” that was in the employment agreement but not located within the termination clause itself to find the entire termination clause unenforceable. As a result, moving forward, employers must be cautious of the Court’s ability to connect disparate contractual termination language contained anywhere in an employment agreement to termination clauses in analyzing the enforceability of the termination clause.

The Facts and Issues

Sonia Gracias’ (“Gracias’”) employment as a dental hygienist with Dr. David Wald Dentistry Professional Corporation (“Walt Dentistry”) was terminated without cause after five (5) months and twenty-one (21) days. Gracias was provided with her entitlements under the Employment Standards Act, 2000, S.O. 2000, c. 41 (the “ESA”). Gracias then brought an action for wrongful dismissal, in which she claimed damages for her wrongful dismissal, damages for discrimination under Ontario’s Human Rights Code, R.S.O. 1990, c. H.19, and punitive damages.

Gracias found reemployment seven (7) months after her termination; at the summary judgement motion, Gracias accordingly claimed seven (7) months of wages in lieu of reasonable notice of termination at common law, and abandoned her claims for human rights and punitive damages. Walt Dentistry’s defence at the motion asserted that Gracias’ employment contract contained an enforceable term limiting her termination entitlements to the ESA minimums, and in the alternative, that at best Gracias was entitled to one (1) month of pay in lieu of reasonable notice of termination at common law.

As a secondary feature of this summary judgement motion, in a rarely seen move in wrongful dismissal cases, Walt Dentistry also alleged that Gracias falsified evidence of her mitigation efforts. Walt Dentistry retained a forensic expert to analyze Gracias’ mitigation evidence, and relied on this expert’s report and evidence.

As a result, the key issues at the summary judgement motion were: whether Gracias’ contract with Walt Dentistry (the “Contract”) was enforceable in restricting Gracias’ termination entitlements and, if not, the applicable reasonable notice period; and, the ancillary issue of the merits of Walt Dentistry’s argument that Gracias had falsified her mitigation evidence.

Gracias’ Contract contained the following language:

15. Your employment may be terminated without cause for any reason upon the provision of notice equal to the minimum notice (or pay in lieu of notice) and severance (if applicable), as required to be provided under the terms of the Employment Standards Act. If your employment is terminated without cause, the Employer will continue your benefit coverage (if any) for such period as the Employment Standards Act shall require. By signing below, you agree that upon receipt of your entitlements under the Employment Standards Act, no further amounts shall be due and payable to you, whether under the Employment Standards Act, any other statute, or at common law. In no circumstances will you receive less than your entitlements to notice, severance (if applicable), and benefits continuation (if any), pursuant to the Employment Standards Act…

21. You agree that you will ensure that your direct or indirect personal interests do not, whether potentially or actually, conflict with the Employer’s interests. You further covenant and agree to promptly report any potential or actual conflicts of interest to the Employer. A conflict of interest includes, but is not expressly limited to the following…

A failure to comply with this clause above constitutes both a breach of this agreement and cause for termination without notice or compensation in lieu of notice…

22. Confidential Information – You recognize that in the performance of your duties, you will acquire detailed and confidential knowledge of our business, patient information, and other confidential information, documents, and records…

In the event that you breach this clause while employed by the Employer, your employment will be terminated without notice or compensation in lieu thereof, for cause. This provision shall survive the termination of this Agreement.

24. You are not permitted to use the internet, update Facebook, or perform any social networking on the internet during office hours, unless you are on your lunch or a break. You should also not receive personal phone calls, or receive or send text messages during working hours, except while on break. Personal phone calls should be restricted to emergency calls only. A breach of this provision will result in disciplinary action, up to and including termination for cause.

[emphases added]

The Court’s Decision: For Cause Language Invalidates Termination Clause, 3 Months Notice Awarded, and Mitigation Evidence Was Not Falsified

Regarding the issue of the Contract language, the Court reiterated the standard principle that in the absence of express and clear contractual language to the contrary, an employee in indefinite-term employment is entitled to reasonable notice of dismissal or pay in lieu thereof at common law. Therefore, only enforceable contractual terms could restrict Gracias’ entitlements on the termination of her employment.

The Court then restated the principle of Waksdale: language that disentitles the employee of any termination entitlements for conduct that does not rise to the threshold of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned” (as stated by Regulation 288/01 to ESA) will be found void and therefore unenforceable in restricting any termination entitlements. Notably, Waksdale found that such offending language would render any termination clause void in its entirety, regardless of whether the unenforceable language was in fact relied on and even if a severability clause is in place.

The Court found that the termination language at paragraph 15 of the Contract was enforceable in restricting Gracias’ termination entitlements. However, the Court then went on to say that “while the termination without cause provision in the employment contract may be lawful, the termination for cause provision contracts out of the Act and is void,” as it disentitled Gracias from any termination entitlements for conduct that did not meet the statutory standard. The Court did not specify which “termination for cause provision” it was referring to; ostensibly, the reference could only be to the language of paragraphs 21, 22 and 24 of the Contract, as bolded above.

The Court reiterated that the “for cause” language could not be severed from the termination clause at paragraph 15. The Court concluded that “the termination for cause provisions” in the Contract were void and unenforceable based on the authority of Waksdale, which has been repeatedly affirmed and not overturned, and accordingly, the entire termination clause at paragraph 15 of the Contract was voided as well. This E-Bulletin assumes that the reference to “termination for cause provisions” in the plural (as opposed to the previous reference in the singular) is the Court’s intentional diction and not an oversight or a typographical error. 

In the result, following its decision regarding the unenforceability of the Contract’s termination language, the Court fixed Gracias’ entitlement to notice of termination at three (3) months, in light of a range of factors that the motion judge weighed against the background of applicable case law.

On the ancillary topic of alleged evidentiary fraud, the Court did not accept Walt Dentistry’s argument that Gracias had falsified her mitigation evidence. The Court parsed the evidence of Walt Dentistry’s expert evidence, and found that on a balance of probabilities, the expert’s identified discrepancies with Gracias’ evidence indicated “the product of mistake or misadventure [rather] than of a grand and continuing mitigation fraud.” Ultimately, Walt Dentistry’s argument on Gracias’ alleged mitigation fraud was not helpful to its position at the summary judgement motion, and proved inconsequential to the Court’s decision.

Take Away for Employers

While Gracias is not a departure from Waksdale, the Court’s reasons in Gracias arguably expands the principles of Waksdale to allow any language discussing termination “for cause” found anywhere in in an employment agreement to be used by a Court to declare the entire termination clause unenforceable.  

The Court’s finding that the “the termination for cause provisions” were void is telling in this respect—the Court seemed to address all of the sentences regarding termination for cause in paragraphs 21, 22 and 24 of the Contract without finding the need to assess them individually, presumably finding they all failed on the same principle.

We strongly recommend you contact a member of our team in order to review your contracts (including recent templates), to draft any fresh templates or to discuss the best course of action relating to the introduction of updated employment contracts. In situations where contracts must be updated to prevent enforceability issues, employers will need to offer fresh consideration to the employee in exchange for the employee’s acceptance of the newly updated contract.  Employers should also consider whether they have language in their policies that make use of “for cause” language and whether such language should be modified in light of the above noted principles.