Employment contract's unenforceable confidentiality clauses invalidated termination provisions

The case sheds some light on questions around conflict of interest stipulations

Employment contract's unenforceable confidentiality clauses invalidated termination provisions

by Rhonda B. Levy and Barry Kuretzky of Littler

Two years ago in Waksdale v. Swegon North America Inc., 2020 ONCA 391,  the Ontario Court of Appeal established the proper method for determining whether a termination clause in an employment agreement is enforceable.  Applying the standard established in this case, the factfinder must analyze the agreement as a whole rather than on a piecemeal basis, and if any termination provision in the agreement is contrary to the requirements of the Employment Standards Act, 2000 (ESA), all termination provisions in the contract will be considered unenforceable, regardless of the existence of a severability clause, which cannot be utilized to sever the offending portion of the termination provisions.  

Since Waksdale was decided, its reasoning has generally been applied to invalidate actual termination clauses that do not comply with the ESA.  In Henderson v. Slavkin, 2022 ONSC 2964, however, the court found that the actual termination clause complied with the ESA, but that the confidentiality and conflict-of-interest clauses were unenforceable because they did not comply.  Accordingly, the court found all termination provisions in the employment agreement invalid, and that the employee had been wrongfully dismissed.  Henderson v. Slavkin underscores how widely the principle in Waksdale will be applied.   

Background

The employers, oral surgeons (Employers), operated two oral surgery dental offices in Ontario.  The employee was the receptionist in one of the two offices for 30 years until April 2020 (Employee).

The Employers’ staff did not have employment contracts; however, in 2015, upon making plans for their future retirement, the Employers asked their staff, including the Employee, to sign an employment contract in exchange for $500 (2015 Contract). The employment of those who did not sign the 2015 Contract would terminate in May 2017. 

The 2015 Contract contained a termination without cause clause (clause 13), a conflict-of-interest clause (clause 18), and a confidential information clause (clause 19).  The latter two clauses warned that a failure to comply with them would constitute a breach of the 2015 Contract and be cause for termination without notice or compensation in lieu of notice; however, under the ESA such breaches are not always grounds for termination without notice or pay in lieu of notice. 

The clauses are set out below:

13.  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 any other benefits required to be paid under the terms of the Employment Standards Act, if any.  By signing below, you agree that upon receipt of your entitlement under the Employment Standards Act, no further amount shall be due and payable to you, whether under the Employment Standards Act, any other statute or common law. 

18.  Conflict of Interest.  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)  Private or financial interest in an organization with which does business [sic] or which competes with our business interests;

(b)  A private or financial interest, direct or indirect, in any concern or activity of ours of which you are aware or ought reasonably to be aware;

(c)  Financial interests include the financial interest of your parent, spouse, partner, child or relative, a private corporation of which the [sic] you are a shareholder, director or senior officer, and a partner or other employer;

(d)  Engage in unacceptable conduct, including but not limited to soliciting patients for dental work, which could jeopardize the patient’s relationship with us.

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.

19.  Confidential Information.  You recognize that in the performance of your duties, you will acquire detailed and confidential knowledge of your business, patient information, and other confidential information, documents, and records.  You agree that you will not in any way use, disclose, copy, or reproduce, remove or make accessible to an person or other third party, either during your employment or any other time thereafter, any confidential information relating to our business, including office forms, instruction sheets, standard form letters to patients or other documents drafted and utilized in the Employer’s practice except as required by law or as required in the performance of your job duties.

For clarity, confidential information includes, without limitation, all information (in written, oral, tape, cd rom, diskette, and USB keys or any electronic form) which relates to the business, affairs, properties, assets, financial condition and plans, concerning or relating to the Employer, our dental practice or patients and specifically includes all records, patient files, patient lists, patient names, patient addresses, patient telephone numbers, email addresses, invoices and/or statements, daily appointment sheets, radiographs, marketing information and strategies, advertising information and strategies, and financial information.

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.     

The Employee signed the 2015 Contract and continued to work. 

At a meeting in November 2019, the staff were provided written confirmation that their employment would terminate effective April 30, 2020, i.e., they would have working notice of six months.  The Employee, who was age 63 at the time, continued to work until February 2020.  She then went on a vacation followed by sick leave and was paid her full salary throughout.  The Employee then moved back to her hometown. 

The termination of the Employee’s employment coincided with the COVID-19 pandemic.  She did not begin to seek new employment until January 2021.  In May 2021, after applying for a variety of jobs, she obtained employment as a frontline worker in a long-term care home.   

The Employee claimed that because the 2015 Contract was unconscionable and contained provisions contrary to, among other statutes, the ESA, it was illegal and should be set aside, and that she was entitled to common law damages.  

Decision

Termination Clause

The court found nothing in the termination clause that was contrary to or inconsistent with the provisions of the ESA.

Conflict-of-Interest Clause

The court concluded that the Conflict-of-Interest Clause was invalid and must be set aside.  It noted that under the ESA even those terminated for cause are entitled to minimal entitlements unless the employer can establish that the employee is guilty of wilful misconduct or wilful neglect of duty.  The court concluded that the provisions enumerated in this clause were not suggestive of such acts; instead, they were overly broad and ambiguous. 

Confidentiality Clause

The court also found that the Confidentiality Clause was invalid and must be set aside. It noted that the ESA requires a disclosure of confidential information to be wilful and not trivial to support a termination without notice.  Noting that “an employee is entitled to know at the beginning of an employment relationship what the employment will be at the end of their employment and how and when it may be terminated without cause,” the court determined that in this clause it was unclear in what circumstances the disclosure of confidential information could occur without immediate termination for cause without notice.  The court envisioned the possibility that confidential information could be inadvertently disclosed in a situation that was not wilful and/or that was a trivial breach.  Accordingly, the court concluded that the clause did not respect the ESA requirement that a disclosure of confidential information had to be wilful and not trivial to support a termination without notice.   

Because the Conflict-of-Interest and Confidentiality Clauses did not comply with the ESA, the court found that the employment contract was invalidated, and the employee had been wrongfully dismissed. 

Mitigation

The Employers claimed the Employee failed to mitigate her damages because she did not obtain new employment until 18 months after they terminated her employment, and because she did not apply to dental or oral surgeon offices.  The court did not agree, “…given the pandemic, the long economic recovery, the difficulty of finding work as businesses slowly began to open, as well as the plaintiff’s age and her move to a smaller centre…”  In light of these unique factors, and given the Employers’ failed to demonstrate there were open positions the Employee should have applied for, the court concluded that following her move, the Employee “acted reasonably and did her best to find work.”  In this context, the court deducted three months from the notice period for the length of time it took her to mitigate.    

Canada Emergency Response Benefit (CERB)

The Employee received $10,000 in CERB during the pandemic.  In considering whether her CERB was a “compensating advantage” and, if so, whether it should be deducted from her wrongful dismissal damages, the court acknowledged that the caselaw is split.  After considering, among other decisions, some we have written about (including, but not limited to, Iriotakis (discussed here), Walt Dentistry (discussed here), and Hogan (discussed here)), the court concluded the CERB did not amount to a compensating advantage, and that the Employee’s damage award should not be reduced by her CERB payments.  The court made this decision because there was a real risk the Employee would be required to pay the CERB back given that she had not ceased working for reasons related to COVID, as required.  In fact, her notice of termination predated the pandemic and the availability of CERB and her employment was terminated for reasons unrelated to the pandemic.  The court emphasized that CERB is a benefit intended as an indemnity for wage loss related to COVID, not for wage loss arising from the employer’s breach of an employment contract. 

Finally, the court stated that even if it was wrong in concluding that the Employee’s CERB did not amount to a collateral benefit, she had been wrongfully dismissed and:

She should not have to bear the risk of not being made whole, especially at her advanced age and after being a loyal and dedicated employee for 30 years…in some cases a strict application of the compensation principle can lead to injustice …this is one of those cases.

Bottom Line for Employers

Henderson v. Slavkin leaves no doubt that, in following the principle established in Waksdale, courts will not restrict their focus to whether an actual termination clause is unenforceable; they will examine all provisions in any agreement or policy that provides that an employee’s failure to comply with them would be cause for termination without compensation.  Should a court determine that any such provision offends the ESA, it can invalidate a termination clause that would otherwise be enforceable. 

Accordingly, employers are encouraged to examine carefully all clauses in their agreements, plans, manuals, and policies that provide that an employee’s failure to comply with them would be cause for termination without compensation, to ensure that they are not contrary to the ESA.  In conducting this examination, employers should seek the assistance of experienced employment counsel.   

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