Anonymised, illustrative composite. Forty-one written contracts, one imported phrase in each, and a single line of the Employment Standards Act that turned the whole diligence schedule into a warranty nobody could rely on.
At a glance
The target was a 41-employee logistics brokerage, sold by share purchase. Every employee had signed a written employment agreement, and the buyer’s counsel had reviewed all 41 as part of employment diligence. Each contract capped an employee’s entitlement on a without-cause termination at the ESA statutory minimum — a standard, defensible clause, and the reason the buyer’s model priced the target’s termination liability as low and predictable.
Each of the same 41 contracts also carried a separate for-cause termination clause, and it was worded the way most templates still are: the employer could terminate “for cause” without notice or pay in lieu, where cause meant conduct “incompatible with the employment relationship” or a serious breach of the employee’s duties — the ordinary common-law definition of just cause, not the ESA’s own, considerably narrower one.
Nobody at the target had ever tried to rely on the for-cause clause; it had sat unused since the contracts were signed. That is exactly why the diligence team’s first pass missed it — the without-cause clause was the one that mattered for pricing, and it read as ESA-compliant on its own. The defect was not in the clause the buyer expected to use. It was in a clause nobody had ever invoked, sitting a few lines above it in the same document.
The 41 contracts covered employees with service ranging from eight months to fourteen years. Under the ESA-capped without-cause clause as drafted, the buyer’s model showed an aggregate contingent termination liability of roughly $410,000 if every contract were enforced as written. Reasonable notice at common law, applying the rough guideline of one month per year of service that Ontario courts commonly use as a starting point, produced an aggregate figure closer to $1.35 million across the same 41 people — more than three times the number the deal had been priced against, concentrated in the longest-tenured employees, whose common-law notice periods diverge furthest from the ESA cap.
O. Reg. 288/01 s.2(1) sets out the ESA’s only cause exemption from notice, at paragraph 3: “An employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” That is a narrow, specific test. Ordinary common-law just cause — the standard these contracts actually used — is broader, and a clause that purports to let the employer terminate without notice on the common-law standard authorises the employer to withhold ESA notice in circumstances the Regulation does not exempt. That is a contracting-out of an employment standard.
ESA s.5(1) is unequivocal about the consequence: “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.” The word is void, not voidable and not read down to what the ESA would have permitted — the whole clause fails.
The remaining question was whether voiding the for-cause clause also voided the separate without-cause clause the parties were actually relying on, and that is precisely what the Court of Appeal for Ontario decided in Waksdale v. Swegon North America Inc., 2020 ONCA 391. On facts where the employer conceded its for-cause clause was void and argued its without-cause clause should still stand on its own, the Court held: “An employment agreement must be interpreted as a whole and not on a piecemeal basis. The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA.” It went on to hold that courts “will not enforce termination provisions that are in whole or in part illegal,” regardless of whether the offending language sits in the same clause, a separate clause, or is ever actually relied on by the employer. A severability clause does not save it either — the Court declined to apply one for exactly this purpose.
Put together: a for-cause clause drafted to the common-law standard is void under s.5(1) because it exceeds O. Reg. 288/01’s narrow wilful-misconduct exemption, and under Waksdale that voids the without-cause clause too — even the one the parties never disputed and never intended to litigate.
The buyer treated the finding as a pricing and structuring issue rather than a deal-breaker. The purchase price was renegotiated down by a fraction of the $940,000 gap between the ESA-capped and common-law figures, reflecting that not every employee would ever actually be terminated and that common-law notice is itself a range rather than a fixed number. The purchase agreement added a specific indemnity for termination costs above the ESA minimum for a two-year post-closing period, and the buyer began replacing the template agreements with ESA-compliant versions for new hires going forward — existing staff kept their (unenforceable) contracts rather than risk a renegotiation that would have to disclose the defect to the people it protected.
Had the buyer relied on the diligence team’s first-pass figure and closed without adjustment, the first contested termination after closing would have tested the clause in litigation on the buyer’s dime, with the outcome effectively predetermined by Waksdale. Each termination handled on the assumption the ESA cap applied would have understated its true cost by roughly the same three-to-one ratio the aggregate figures show — a liability that does not appear on any balance sheet and would only surface one dismissal at a time, for years, as the least visible kind of undisclosed liability a share deal can carry.
The tell was that the clause nobody had ever used was the one doing the damage. Diligence naturally focuses on the provision a party expects to rely on; Waksdale’s holding is precisely that this focus is not enough, because an unenforced clause still poisons the enforceable one sitting beside it. Every employment contract in a target’s data room needs its for-cause language checked against O. Reg. 288/01 s.2(1) specifically — not against a general sense of whether the contract “looks compliant” — because the defect that matters is almost never in the clause that gets used.
Quebec removes the defect at its root rather than voiding it after the fact. Civil Code of Québec art. 2092 provides that “the employee may not renounce his right to obtain an indemnity for any injury he suffers where insufficient notice of termination is given” — a Quebec employer cannot cap art. 2091 reasonable notice by contract at all, so there is no ESA-style minimum floor to draft down to and no for-cause clause capable of contaminating a notice clause that never existed in enforceable form to begin with.
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