Saving Clauses Do Not Permit Employers to Contract Out of the ESA

Written by Lewis Waring, Paralegal, Editor, First Reference Inc.

In Groves v UTS Consultants Inc, 2019 ONSC 5605 (“Groves”), the Ontario Superior Court of Justice (“SCJ”) held that an employer cannot contract out of its obligations under the Employment Standards Act, 2000 (“ESA”) by including a “saving clause” in its employment contract. Moreover, a contract that attempts to make an employer exempt from its obligations under the ESA is unenforceable, and, in Groves, the SCJ merely applied this uncontroversial principle to what is known as a saving clause.

Facts

The defendant and former employer in this case, UTS Consultants Inc. (“UTS”), is a corporation in the telecommunications industry. As of November 2014, OEC, a company related to Oakville Hydro Corporation, bought UTS by purchasing all of its shares. The Plaintiff, Wayne Groves (“Mr. Groves”), founded UTS in 1992 and served as its president from that time until UTS dismissed him in 2017.

The operating shareholders of UTS before OEC’s purchase were Groves, his spouse and

Clayton Jamison Uyede. On November, 2014, Mr. Groves, his spouse and Clayton Jamison Uyede entered into a Share Purchase Agreement (“SPA”) with OEC. The SPA transferred ownership of all shares to OEC for $6 million, with an additional $2 million “earn out” amount. Of that total amount, Mr. and Mrs. Groves received $2,375,678.99 in exchange for their shares.

The SPA required Julie Groves to resign from UTS but did not request or require that Mr. Groves resign.

Upon taking ownership of UTS, OEC dismissed and re-hired Mr. Groves. On November 5, 2014, UTS presented Mr. Groves with a resignation letter “effective immediately” addressed to “UTS and the directors and shareholders thereof (at para 13).” On the same date, Mr. Groves signed a letter of employment with a salary of $120,000 and a number of clauses relevant to the proceedings. Namely, Mr. Groves’s letter of employment contained a termination clause, saving clause, non-competition clause, non-solicitation clause and confidentiality agreement.

The termination clause stated that Mr. Groves’s notice period was limited to a range of between three and 12 months and that “any prior service is excluded and you hereby waive and release any prior service entitlements (at para 40).”

On September 26, 2017, UTS dismissed Mr. Groves without cause. This dismissal took place in an OEC office separate from the UTS office while the locks at UTS were changed and his departure was announced to UTS staff. The terms of Mr. Groves’s termination included the following:

  • 13 weeks of remuneration, including benefits;
  • outstanding vacation pay; and
  • “variable pay for the calendar year 2017 pro-rated for the period up to three weeks after the date of termination of employment (for a sum of $30,103).”

Mr. Groves rejected UTS’s termination offer and, in response, UTS provided Mr. Groves with $31,536.85, representing three months of compensation, and continued benefits during his notice period.

Issues

Section 5(1) of the ESA states “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.”

Section 9(1) of the ESA states that an employee of a purchased business is “deemed not to have been terminated or severed” upon the purchase of his or her employer’s business. Also, this section states that an employee’s employment with the former owner who sold the business is “deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.”

At issue in Groves was, firstly, whether the termination clause of the employment agreement was in compliance with the ESA, and, secondly, if the termination clause of the employment agreement failed to comply with the ESA, did the saving clause allow the termination clause to be enforced and thus “save” the contract from being declared void.

Analysis and decision

Termination clause: The court held that the termination clause in the employment agreement was void because it did not comply with the ESA. The exclusion of prior service in that clause failed to comply with s. 9 of the ESA, with the SCJ stating, “Mr. Groves’ pre-sale employment service could not be waived or released for the purpose of calculating ESA entitlements (at para 41).” The court calculated that Mr. Groves was entitled to 32.75 weeks of notice under the ESA and that the 12 weeks of notice provided by UTS upon dismissal fell short of its ESA requirements.

Saving clause: Key to UTS’s defence was the existence of a “saving clause” within its employment agreement with Mr. Groves. The saving clause in the contract served to allow the termination clause to be applicable if found to be void due to conflict with the ESA. The two cases discussed in relation to this point were Amberber v IBM Canada Ltd, 2018 ONCA 571 (CanLII), 424 DLR (4th) 159 (“Amberber”) and Rossman v Canadian Solar Inc, 2018 ONSC 7172 (CanLII), 300 ACWS (3d) 69 (“Rossman”).

In Amberber, the Court of Appeal for Ontario held that the court may “read up” a termination clause if an interpretation existed that complied with the ESA. UTS argued that the ruling in Amberber applied such that “even if the Termination Provision breaches the ESA, it contains a ‘saving clause’ that would permit this court to apply it (at para 60).”

In Rossman, the Superior Court of Justice held that “a saving provision cannot be used to rewrite the express language in an agreement to cause it to comply (at para 62).” Based on Rossman, the court rejected UTS’s interpretation of Amberber and held that “the saving clause does not assist and the Termination Provision cannot be read up in order to bring it into compliance with the ESA (at para 62).”

Takeaway

The general takeaway for Ontario employers is uncontroversial. Employers are not entitled to contract out of their obligations under the ESA. If a court finds that any provision to an employment contract fails to comply with the ESA, that contract will be found void, often leading to devastating financial results.

One more specific takeaway for Ontario employers is that a saving clause does not give employers permission to draft termination clauses that attempt to contract out of the ESA. Any idea that a saving clause may be used to allow a judge to interpret an illegal clause in an ESA-compliant fashion and save an otherwise void contract is misguided. A saving clause is not an interpretive tool or a “back-door” exception to employment standards obligations in Ontario.

Comments

  1. David Collier-Brown

    I quite appreciate the value of articles such as this, educating employers to avoid writing clauses that the courts will promptly overturn…

    But, thinking as a public-policy nerd, should there not be a _cost_ to writing such clauses?

    Should persons ignoring sane legal advice and attempting to convince employees to contract out of their rights not be sanctioned by the courts?

    Perhaps for attempting to gain a benefit by making the employee agree to honor a false and perhaps fraudulent pretense?

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