All employment relationships create an “employment contract” between the parties. Whatever the terms and conditions are that the parties have agreed to become the terms of the “employment contract” between the parties. An employment contract does not need to be in writing to be enforceable, but written employment contracts are highly recommended to eliminate any uncertainty as to what the terms of employment are.
While written employment contracts are useful for both the employee and employer to reduce uncertainty and to set out the parties’ mutual expectations, as a practical matter most employment contracts are written by the employer and designed to protect the employer’s interests.
So long as the contractual terms are not contrary to the relevant employment legislation, the parties can include virtually whatever terms they wish to in the employment contract. Some common provisions that we often recommend to employers are:
Length of engagement (fixed term or indeterminate length) – if employment is for a fixed term, the end date should be specified. If employment is to continue indefinitely, the contract should state that employment will continue until terminated in accordance with the contract. We generally do not recommend that employers use fixed term contracts, since problems often arise if they are not properly administered.
Probationary period – the law does not imply a probationary period. If an employer wants a probationary period, it must specify it. Since the Employment Standards Act (in BC) requires notice of termination after 3 months of service, probationary periods are often limited to 3 months.
Ability to change to job function – significantly changing job function may trigger a constructive dismissal, unless the employer’s right to do so is preserved by contract.
Remuneration and benefits – this is often the most important clause to the employee. When addressing insurance benefits it is important for employers to mention that benefit entitlement is determined by the insurance carrier and insurance policy, and not to guarantee specific coverage or any benefit level (unless required to do so).
Ability to impose temporary layoff – a layoff is usually deemed to be a termination of employment (at common law) unless the employer has contractually reserved the right to impose temporary layoffs. In non-union workplaces where layoffs are permitted, Employment Standards provisions would still apply.
Termination provisions – this is probably the single most important clause in a non-union employment contract. Without a valid termination clause an employee is entitled to reasonable notice of termination of employment. An enforceable termination clause will reduce an employer’s severance pay liability by limiting the employee’s notice entitlement.
Confidentiality – all employees are subject to some common law duties of confidentiality. Where employees have access to confidential information, confidentiality obligations should be specifically addressed in the contract.
Restrictive covenants and post employment obligations – there are a very limited number of work environments where restrictive covenants would be appropriate. They are generally used to protect an employer’s customer base or workforce from solicitation by ex-employees. Restrictive covenants are generally difficult to enforce, and must be carefully drafted and applied.
Since the employer is usually the party that drafts the employment contract, the courts will give the employee the benefit of the doubt where there is any ambiguity in the written contract (this is known as the contra proferentem rule). It is important that an employment contract be drafted properly if you want its terms to be enforced.
Making the contract enforceable
The courts can find particular terms of an employment contract to be unenforceable for any number of reasons. We have found that the 3 most common reasons for a court to strike down an employment contract are:
The contract itself is poorly drafted – if the wording of the contract is ambiguous, or violates Employment Standards legislation, this will provide the court with a reason to refuse to enforce the contactual terms.
The contract was not entered into properly – there are a number of technical requirements to entering a binding contract. Most employers are familiar with the concepts of offer, acceptance, and consideration being required for any contract. A common error made by employers is to present the written contract to the employee after the employee has accepted employment with the employer. Presenting the employee with a written employment contract on his or her first day of work (or in fact at any time after the employee has already accepted the position) invites the court to deem the contract unenforceable for “lack of consideration”.
The employee’s duties or position have significantly changed since the employment contract was entered into – employment contracts should be revised from time to time to ensure that they accurately reflect the actual employment relationship between the parties. If the written contract was entered into when the employee started in the mail room, and the employee is now the CEO, the terms of employment may not bear any resemblance to the job the employee now holds. In such cases, the court may conclude that the terms and conditions of employment have changed so significantly that the “substratum” of the written contract has disappeared or eroded sufficiently to make the contract unenforceable.
We suggest two strategies to increase the chances that your employment contract will be enforced by the courts:
Get legal advice to draft and implement the contract – if there is anything unusual or complicated about the employment relationship being contemplated, or if you are dealing with a highly paid executive level hire, you may want to get legal advice. Making a mistake with a executive level employee can be an expensive prospect.
Develop a contract execution process that you follow religiously – if you have a properly drafted standard form employment contract, and always follow the same effective process of interviewing candidates, making job offers and executing the written contract, your chances of enforcing the contract will increase significantly.
Independent contractor agreements
Is the contractor really an employee?
An individual may wish to enter into a working relationship with an employer on the basis of being an “independent contractors” rather than an employee.
From the individual’s perspective, there is often a perceived tax advantage, since many individuals believe that a number of expense deductions, previously unavailable to them as employees, are now available to them as independent contractors.
From a Company’s perspective, it may be advantageous to have an independent contractor rather than an employee, since an independent contractor is not subject to the Employment Standards Act, and there is a potential savings on EI and CPP contributions.
Companies and individuals about to enter an independent contractor business relationship should do so with caution. If an individual is to declare himself an independent contractor, he must in fact be an independent contractor. If the individual functions like an employee, simply calling her an independent contractor, and providing her with an expansive, written “consulting agreement” will not make this individual an independent contractor in the eyes of the Canada Revenue Agency, or the Employment Standards Branch.
To make matters more complicated, the CRA and Employment Standards make their own determinations of the nature of the relationship, and their determinations are not necessarily the same. There is nothing to prevent the CRA from declaring that an individual is an independent contractor for tax purposes, while the Employment Standards Branch declares the same individual is an employee for the purposes of the Employment Standards Act. The Employment Standards Act contains a very broad definition of the term “employee”.
The potential tax liability for an employer to treat an individual as an independent contractor when that individual is actually an employee is that the employer has an obligation to withhold income tax, CPP contributions, and EI premiums for its employees. If this withholding is not done by the employer, and the individual is deemed an employee, the CRA can seek payment of the withholdings that should have been made by the employer.
Similarly, if Employment Standards determines the individual is really an employee and not an independent contractor, the employer may be held liable to retroactively pay the individual minimum wage, holiday pay, termination pay, or any other entitlement that employees have under the Employment Standards Act.
To determine whether an individual is an independent contractor or employee is always a judgment call. There are a number of tests that can be considered, but most involve a consideration of some or all of the following factors:
The control factor – the most important factor tends to be whether the Company controls, directly or indirectly, the way the work is done and the work methods that are used. If a Company directly controls the worker’s activities, has the right to hire, fire and determine salary, and determines the place, time and manner of how the work is done, the individual is probably an employee and the Company is an employer.
Ownership of tools -who owns the tools is often indicative of whether the individual is an independent contractor. The amount invested, the value of the equipment or tools, and the rental and maintenance of the equipment and tools will be considered. Normally, an employee is supplied with equipment and tools by the employer, while independent contractors may provide their own tools.
Chance of profit / risk of loss -independent contractors are often entrepreneurial, in that the enterprise they participate in may allow them to profit from the enterprise, rather than to receive a straight salary. Factors such as responsibility for bad debts, damage to equipment or materials, costs associated with delivery delays, and operating costs all enter into the equation.
The integration factor – this is often a broad review of the other three factors that have been considered, to assess how involved in the business the individual is. If the individual performs functions usually done by an employee, supervises a company’s people or processes within the company hierarchy, or is closely managed by other employees, that individual will look like an employee. If a company calls some individuals contractors and some employees when they perform the same function or hold the same position, it will be difficult for the employer to justify the difference between those individuals.
Workplace Policies and Manuals
Contractual terms should be in employment contracts rather than policy manuals
Is the policy intended to provide guidance and advice about how the workplace operates (no contractual force), or does the policy set out terms the employer intends to rely upon and hold the employee to (contractual force)? Depending upon how and when employment policies are presented to the employee, it is sometimes it is difficult to tell the difference.
To make enforcement of onerous terms of employment more likely, we usually suggest that written employment contracts rather than policy statements be used for important or essential terms. Proving the terms of the contract is easiest if the contract was entered in a “formal” manner, where the job offer includes a written contract which is properly signed before commencing employment. If a court perceives that an important term was hidden within a vast policy manual or simply not discussed or recognized at all, the chances of it being enforced are slim.
Employment contracts are best used for terms that rarely change. Employers will want to retain the ability to revise policies from time to time without having to go through offer/acceptance/consideration or notice requirements.
It should also be clear which policy items have “contractual force” and which are “advice”. Too many policies, all purporting to have contractual intent make it unlikely each employee will genuinely “understand and agree” to the terms. Having some policies with “contractual force” and others without will create confusion for the employee (and potentially the court). In theory, each contractual term should be discussed and negotiated. In actual practice, each contractual term should at least be identified and understood by both parties.
There are a number of advantages to having essential terms in an employment contract rather than a policy manual, even if the contract is very limited in its scope:
A short list of critical contractual terms identifies the most important terms that will bind the parties.
The employee will have a better chance of understanding the critical terms.
The employee will be able to distinguish contractual terms from policy.
It is easier to demonstrate a common intention to be bound by the terms when there are fewer contractual terms.
Also keep in mind that policies with contractual force are binding on the Employer as well as the Employee. If a policy has contractual force it limits the employer’s ability to exercise any discretion in applying the policy. In such cases a statement about how the employer intends to manage will become a contractual requirement for the employer to follow and failure to follow such a policy could be a breach of contract.
Generally we advise employers to use policy manuals to present the employees with information about company expectations and guidance about how the employer manages its workforce. Onerous contractual terms should be reserved for written employment contracts.
Suggested workplace policies
There is virtually no limit to the types of policies you might include in your policy manual but employers should be cautious to ensure that the provisions of the policy manual do not contradict the terms of the employment contract or employment standards legislation.
SUGGESTED policies include:
Employee monitoring policies – are used to define in what circumstances there is a “reasonable expectation of privacy”, should the employer want to reserve the right to monitor phone or computer use in the workplace.
Absenteeism policies – will need to differentiate between culpable and non-culpable absenteeism. Non-culpable absenteeism policies must recognize the employer’s obligation to accommodate an employee’s disabilities to the point of undue hardship.
Drug and alcohol policies – can be useful, but keep in mind that addiction is a disability and Human Rights Code requirements and the duty to accommodate will apply.
Harassment policies – most employers use the broader “harassment” policy rather than the specific “sexual harassment” policy, but both are useful in the workplace. Employment legislation may require that the employer have bullying and harassment policies in certain circumstances.
Safety policies – these are often workplace specific. While WCB requirements are statutory requirements many employers will include a policy for addressing those statutory requirements.
Benefit policies – the policy should outline the types of benefits that are available without providing a guarantee of a particular level of coverage or benefit entitlement. An employer should specifically reserve the right to revise and change the benefit package from time to time.
Computer use policies – such policies often prohibit certain types of computer use and communications for both efficiency and liability reasons. Employers can manage the employee’s personal use of the computer and should make clear to employees when (or if) they employee can have an expectation of privacy in email communications.
Conflict of interest policies – are useful where employees make or influence company purchasing decisions.
POSSIBLE policies include:
Statutory entitlement policies – the Employment Standards Act, WCB, Privacy Act and other legislation govern the workplace. Some employers like to identify statutory requirements by policy even though the employer has no discretion in applying the statutory requirements. Using such policies may be a benefit where the employee needs to know this information but might be unaware of it without a company policy. For such policies the employer must be diligent in making revisions when the legislation changes.
Discipline policies – can be useful to inform employees of the various steps that discipline may take but at the same time create an expectation by the employee that discipline will always follow the policy. It may provide some structure for front line managers when imposing discipline and in non-union workplaces that are vulnerable to union organizing campaigns, implementing a “grievance policy” might weaken this perceived benefit of unionization. The biggest downside to having a written discipline policy is that it may invite the presumption that the policy will be followed before any dismissal for cause takes place. This may ultimately limit the circumstances under which you can safely terminate employment for cause.
Termination for cause or without cause?
For a non-union employee, employment may be terminated by the employer either “for cause” or “without cause”. The primary difference between the two is that in a termination for cause the employee is not entitled to notice or pay in lieu of notice of dismissal. In a termination without cause the employee is entitled to either reasonable notice or contractual notice of dismissal (or pay in lieu of such notice).
To successfully terminate employment for cause is a difficult proposition for an employer. It usually requires a series of warnings to the employee about the conduct or performance deficiencies and requires that the employee be given a reasonable opportunity to correct these deficiencies. Some courts have also suggested that there is a duty to explicitly warn the employee that their employment will be terminated if the deficiencies are not corrected.
To properly build a case for termination for cause an employer must carefully plan and document the process of meetings and warnings it provides to the employee. Warning letters must be clear, concise and be provided to the employee on a reasonable schedule that allows the employee an opportunity to address the problem.
Successfully terminating employment for cause is often difficult. Courts are often sympathetic to the employee, and will reject allegations of cause for dismissal unless the case is absolutely solid.
Terminations will be easier (and more cost effective) for an employer if it ensures that all its employees are subject to employment contracts that contain termination provisions limiting the employees’ severance entitlement. With enforceable termination provisions in a written contract, the employer can avoid having to build the case for dismissal entirely by simply terminating and providing the employee with the limited contractual severance pay required by the contract.
Determining an employee's notice entitlement
When terminating employment without cause, the employee will be entitled to “notice” of the dismissal. This can be provided to the employee as either working notice or pay in lieu of notice (often called severance pay). When determining how much notice an employee is entitled to an employer needs to consider:
Employment Standards Act – the Act sets out the minimum amount of notice that an employee is entitled to, which is based on the employee’s length of service. Employers must recognize that this is only a minimum statutory requirement and that paying the minimum dictated by the Act does not extinguish the employer’s liability for greater “reasonable notice” at common law.
Reasonable notice at common law – unless the parties enter into an employment contract that specifies what an employee’s notice entitlement is in the event of dismissal without cause, the common law implies a term in every employment relationship that the employee will receive “reasonable notice” in the event of dismissal without cause. There is no precise formula to determine how much notice is reasonable notice in any particular situation. Reasonable notice is whatever the judge determines is reasonable having considered all the relevant circumstances of the case. That being said, based upon legal precedents counsel can advise you of the possible range of notice that a court would normally award. The courts consider all of the circumstances of the case but the most important factors in determining how much notice will be awarded are: (1) the employee’s age; (2) the employee’s length of service; (2) the employee’s job function or position with the employer; and (4) the availability of alternate employment.
Contractual termination provisions – if the parties have properly entered into an employment contract and that contract sets out the notice that the employee is entitled to in the event of a termination without cause, then the employee’s notice entitlement will be limited to the notice specified by the contract. So long as the notice provisions in the contract exceed the requirements of the Employment Standards Act, the notice entitlement can be much less that the employee would otherwise be entitled to at common law. A well drafted written employment contract can significantly reduce the amount of an employer’s severance liability and we recommend that employer’s use them for virtually all of their non-union employees.
Structuring a severance package
When terminating employment without cause, the employee will be entitled to “notice” of the dismissal. This can be provided to the employee as either working notice or pay in lieu of notice (often called severance pay). Providing an employee with working notice is rare and should only be used for lower level positions where the employee has no ability to interfere with the company’s operations. Employees whose employment is being terminated will not be particularly motivated to provide their best work and the rare vindictive employee in a sensitive position can do a great deal of damage to the company’s operations on their way out. Generally, providing working notice to an employee is not worth the risk.
If an employee is subject to a written employment contract with termination provisions, the employer will simply provide the employee with whatever severance payment is dictated by the contract.
If severance entitlement is not determined by contract then the employer will have to determine:
(1) the amount of the severance payment to offer to the employee (based upon an assessment of the employee’s entitlement to reasonable notice at common law); and
(2) how to structure that severance offer.
Severance packages are usually offered either in the form of a lump sum payment or as a salary continuance. In either case, the employer will want to get a release from the employee in exchange for that part of the payment that is in excess of the employment standards minimum entitlement.
A lump sum has the advantage of finality – once the payment is made and the release signed, the case is over. The disadvantage (from the employer’s perspective) is that if the employee finds new employment during the notice period, the there will be no reduction in the severance amount and the employee will receive both the severance payment and wages from a new employer in respect of the same period of time.
A salary continuance is structured so that the employee continues to receive his or her regular wages from the employer for the duration of the notice period. The employee has an obligation to look for alternate employment and if they find employment then the salary continuation stops, and the employee receives a lump sum payment. The lump sum payment is some portion (usually half) of the remaining salary continuance payments that would have been made over the rest of the notice period. This structure provides some incentive for the employee to find alternate employment while providing some savings to the employer in the event the employee finds new employment.
Properly structuring a severance package is often complicated. Lawyers representing employees will often try to prevent a salary continuance being imposed on their clients, preferring a lump sum payment. There are also issues of the employer’s potential liability for lost employment benefits (particularly insurance benefits) which can be very costly to an employer if not handled properly. When structuring any significant severance package legal advice is recommended.
Employment Related Litigation
Wrongful Dismissal Litigation
Simply put, a wrongful dismissal claim is a claim by an ex-employee that they have been dismissed without cause, without having been provided reasonable notice of the dismissal.
The ex-employee typically makes a claim for damages over a particular period of reasonable notice and that claim can include damages for lost wages, bonuses, commissions, vacation pay and benefits. Ex-employees sometimes make a claim for aggravated or punitive damages, particularly where they allege that the employer has acted in bad faith or has acted maliciously in carrying out the dismissal.
Once the litigation has been commenced, litigation will involve disclosure of relevant documents, examinations for discovery, pre-trial court applications and processes, and ultimately the trial itself.
The court process is reasonably complicated. Employers are well advised to get counsel involved as soon as they receive the demand letter from the employee’s lawyer and prior to the commencement of any legal proceedings.
Post employment competition litigation
Some employers are particularly vulnerable to having customers or employees poached by ex-employees. There is little in the way of common law protection to prevent this from happening.
If an employer wants to restrict an ex-employee’s ability to take customers or other employees with them when they leave it is usually done by using a restrictive covenant in a written employment contract.
Restrictive covenants usually come in two forms:
A non-solicitation clause – which prevents an ex-employee from soliciting an employer’s customers or employees for a certain period of time after having left the employer.
A non-competition clause – which prevents an ex-employee from competing against the employer (or sometimes even working in the same industry) in a particular geographic area for a particular period of time after leaving the employer.
Non-solicitation clauses are usually easier to enforce than non-competition clauses because they are less restrictive but having a court enforce either type of clause is often difficult. Courts are reluctant to enforce such provisions on the basis that they are in restraint of trade. It is critical that the restrictions set out in the restrictive covenants go no further than is absolutely necessary to protect the employer’s legitimate proprietary interests.
This is a complex area of the law. Employers will usually seek experienced counsel to draft the necessary restrictive covenants and for any litigation to try to enforce them.
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