[1]         Doug North’s employment with Metaswitch Networks Corporation was governed by a written employment contract (the “Agreement”). When North’s 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.

[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:

[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 respondent’s 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:

[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.

[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:

[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, aff’d 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.

[16]      The issues on this appeal are:

[17]      When deciding this case, the application judge did not have the benefit of this court’s 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:

[19]      And continuing at paras. 25-28:

[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:

[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:

[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.

[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:

[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.

[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).

[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:

[33]      He continued at p. 1004:

[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:

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

[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.

[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.

[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:

[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.

[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 employee’s 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 court’s dismissal of the appeal in Oudin. The application judge found the motion judge’s reasons in Oudin to be analogous. However, the courts in Oudin also did not have the benefit of this court’s 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 judge’s determination that the termination provisions respecting notice did not offend the ESA. Therefore, this court’s endorsement in Oudin should not be viewed as supporting a broad, overarching principle regarding the motion judge’s application of the severability provision in that case: see R. v. Timminco Limited (2001), 2001 CanLII 3494 (ON CA), 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.

[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.