The Relevance of Employee Sophistication on the Enforceability of “Just Cause” Termination Provisions

A recent decision by the Ontario Superior Court found that the relative sophistication of an employee is irrelevant in determining the enforceability of a contractual termination provision which, on its face, appears to violate the Employment Standards Act (“ESA”). This decision comes just one month after the same Court found the relative sophistication of an employee was relevant in determining the enforceability of such a provision.

In both cases, the question involved the enforceability of a termination provision that invoked the common law standard of “just cause” instead of the ESA standard of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”, which is a higher standard.
Why did the Court reach such different conclusions on the same issue? Which approach is likely to be the correct one?

September, 2021: Rahman v Cannon Design Architecture Inc.

Ms. Rahman earned a significant salary working as a high ranking employee of the defendant employer. She received independent legal advice before signing the employment contract and, through that legal representation, was even able to negotiate improvements to the contract. The trial judge found that Ms. Rahman was a “woman of experience and sophistication.”

It is important to take note of the general assumption underlying employment law in Canada that the employee-employer relationship inherently contains a power imbalance. Employers are typically expected to be in a stronger bargaining position than employees. Due to that power imbalance, an employee may not appreciate the difference between the common law standard of “just cause” versus the requirements of the ESA, which demands a more onerous standard. It is this power imbalance that gives strength to the proposition that employment contracts should clearly comply with the ESA or otherwise be invalidated. Supposedly, this protects vulnerable employees.

The trial judge in Rahman, while being aware of the above principles, found that the “just cause” termination provision was nevertheless enforceable. Ms. Rahman had obtained legal advice and was a woman of experience and sophistication. She did not, therefore, resemble the “vulnerable employee” a strict application of the ESA is intended to protect. Ultimately, the trial judge found that the “just cause” provision reflected the mutual intention of reasonably sophisticated parties and did not violate the ESA. Therefore, the provision was valid and enforceable despite the “just cause” language.

Therefore, in Rahman, the sophistication of the parties was of crucial relevance. But for the sophistication of the parties, the trial judge likely would have found the termination provision to be invalidated.

October, 2021: Livshin v the Clinic Network Canada Inc.

One month later, the Ontario Superior Court released its decision in Livshin. Here, the trial judge took a very different approach. The employee in question was, as in Rahman, highly sophisticated and had obtained independent legal advice. At issue was a termination clause that provided: “The Company has the right, at any time and without notice, to terminate your employment under this Agreement for just cause.”

The defendant employer, likely inspired by the earlier decision in Rahman, argued that there was no need to “protect” the employee because the imbalance of power that typically exists between employees and employers did not exist in this case. On that basis, even if the termination provision violates the ESA through reference to the common law “just cause” standard, it should nevertheless be enforced. If the trial judge in Rahman is to be believed, this would be the correct approach.

However, the trial judge in Livshin disagreed. The common law and the ESA provide different standards for termination. Just cause, at common law, is less demanding than the standard required by statute. According to the trial judge in Livshin, clearly complying with the ESA is the bottom line. Employment agreements that do not comply with the ESA are invalid. This is the case where the employees are unsophisticated and remains the case where they are highly sophisticated. The fact that there is no imbalance of bargaining power in this case is irrelevant. The employment agreement does not comply with the ESA, and the sophistication of the parties does not entitle them to ignore the ESA’s requirements.

The trial judge said it best where, at paragraph 57 of the decision, they wrote:
“While Livshin may be more sophisticated than many employees, and notwithstanding that he was represented by counsel, I can see no reason why the clause at issue had to be drafted in a way that on its face contravenes the ESA. Further, in my view the goal that employers be encouraged to draft clauses that comply with the ESA trumps the suggestion that Livshin may have been better able than many or most employees to recognize the potential peril.”

Which Approach is Correct?

With respect, it would appear that the approach in Livshin is the correct one. It follows the guidance of the Ontario Court of Appeal. According to the Court of Appeal, courts should interpret the ESA in the way that best encourages employers to comply with its minimum requirements, thereby extending its protection to as many employees as possible. Indeed, this means sophisticated employees as well. Likewise, termination provisions in employment contracts should be interpreted in the way that encourages employers to comply with the ESA. The conclusion in Rahman appears to do the opposite by suggesting that where employees are reasonably sophisticated and have obtained legal advice, employers may be forgiven for not complying with the ESA. That the Superior Court has reached polar opposite conclusions in such a short amount of time suggests need for clarification in the law. If either of these decisions are appealed to the Court of Appeal, we likely will find that clarification.