Howard Levitt: A Tough Lesson for a $185,000-a-year Executive Who Had Her Employment Contract Vetted by a Lawyer

The Ontario Court of Appeal held in Waksdale that if any part of a termination provision in an employment contract breached the Employment Standards Act, the entire provision was unenforceable, and the employee would recover full, wrongful dismissal damages. That’s a lot more money than what the employer believed it had contractually bargained for. This is notwithstanding the employee and employer entering into that contract knowingly and willingly.

A new decision in the Ontario Superior Court of Justice, Rahman v. Cannon Design Architecture Inc., has now distinguished the Waksdale decision, creating some solace for employers but uncertainty for everyone.

Farah Rahman, the 61-year-old employee, agreed to an employment contract paying her $185,000 per year, plus benefits and bonus. An important factor is that the employee engaged a lawyer to negotiate her contract.

The contract contained a “just cause” provision whereby Rahman would receive nothing if she was fired for ‘cause’ even if it did not rise to the level of wilful misconduct. This is not as strict a standard as required by the Employment Standards Act and, as result, the Waksdale decision would have operated to make the dismissal without cause section of the contract unenforceable as well.

Unlike in Waksdale, Justice Sean Dunphy declared the termination without cause provision enforceable. He went further to say that Rahman had the benefit of a lawyer to negotiate her contract. She was a sophisticated party earning over $185,000 a year; both parties had equal bargaining power and both parties intended to comply with the minimum standards of the Employment Standards Act.

Employers and employees should both learn from this:

• Employees who engage a lawyer to negotiate contracts on their behalf should have pause before claiming the contract is unenforceable. Ironically, Rahman would have been better off if she had not used counsel.
• Employers should encourage high earning employees (if not all employees) to obtain independent legal advice on their contracts as it offers added protection to both.
• Employers (and their lawyers) should not generally expect to rely on this decision in an attempt to defend poor contracts going forward. However, it now makes such cases arguable. This decision was based on a specific set of circumstances. Most employees do not have equal bargaining power with their employers when negotiating contracts and many cannot afford to hire a lawyer each time they negotiate new employment.
• Lawyers should also be careful. Often when given an apparently unenforceable employment contract, some lawyers advise their employee clients to sign it on the basis that it is unenforceable anyway. The Rahman decision may put an end to that practice. Indeed, it might even create the basis for a negligence case against such a lawyer.

It is important for all parties to consider that context can be as important as the contract itself. Having a lawyer review all contracts, whether an employer or employee, despite this anomaly, is still prudent.

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada. Rob Lilly is a partner with Levitt Sheikh.