Employment contracts are important because they set out the terms of the employment relationship. The contract provides a framework for the obligations, entitlements, expectations and restrictions of both parties. Employment contracts are more than just a document and they matter in governing the working relationship. The contract ensures that at the beginning of a new employment relationship or change in the existing employment relationship, that each party agrees to and understands what is expected of them. Specifically, a contract may outline important terms such as termination clauses, confidentiality agreements, non-compete clauses and lay-off provisions. Having a clear and well-defined employment contract will prove invaluable in establishing and maintaining a good employment relationship.
The most basic of contracts must have offer, acceptance and consideration. The employment contract and its terms must not be unconscionable or illegal and cannot contract out of the applicable legislation such as the Employment Standards Act or the Canada Labour Code.
Having an employment contract is important, but it is even more important that these contracts are actually enforceable in a court of law. Contracts can be determined null and void for a number of reasons. Some reasons include various technicalities, a lack of fresh consideration after a change in employment relationship (such as a promotion), or an unenforceable termination clause. Drafting an enforceable contract is particularly difficult because the courts' interpretation of termination clauses has changed considerably as the common law has rapidly evolved in the past 6 years or so.
The termination clause within an employment contract provides an agreed upon course of action for employers to follow in the event that the employee is dismissed. The termination clause also outlines the exit package that the employee will receive in that event. This provides protections for the employee and obligations for the employer. Having a pre-determined entitlement upon dismissal will help de-escalate a termination situation and provide clarity to both parties. Courts have stipulated the need for these termination clauses to be unambiguous, fair, and within the bounds of the applicable minimum standards legislation. A termination clause may give more notice or pay in lieu of notice than the minimum standards, but it cannot give less.
It is important to note that the minimum standards legislation, that being the Employment Standards Act in Ontario for provincially regulated employers, is different than the common law entitlements. Termination is also very different under the federal regime governed by the Canada Labour Code.
The common law is the body of case law containing past decisions of courts. If an employee has been wrongfully dismissed, a court typically awards considerably more notice or pay in lieu of notice than the Employment Standards Act or the Canada Labour Code stipulate. Termination clauses need to provide the minimums within the applicable legislation. This sounds simple, but the courts have determined that the way in which a termination clause is worded and what is expressly included in it needs to be quite specific. Many clauses that make a nod to the employment legislation would appear to be valid, but are determined unenforceable in a court of law. Drafting enforceable termination clauses is not easy.
An unenforceable termination clause within an employment contract can be extremely costly for employers. If a termination clause is deemed null and void, then the court will award common law damages.
Example of Compensation under the different regimes:
A middle manager has been employed for 20 years with the same organization. She is 58 years old and is earning $60,000 per year. She is being terminated for lack of work. With the proper termination clause under the Employment contract the same Employee would receive the following under the various regimes:
Under the Employment Standards Act, 2000:
The Employee will be entitled to:
- Eight (8) weeks of salary; and
- benefits during the eight (8) weeks.
Calculation: $1,153.84 per week x 8 weeks
Total: $9,230.72 gross + benefits
Under the Canada Labour Code:
The Employee will be entitled to:
- Two (2) weeks salary after 3 months of employment
- Two (2) days per completed years of service (40 days)
Calculation: $1,153.84 weeks x 2 weeks = $2,307.68
Daily rate = $60,000 divided 365 days = $164.38 daily
$164.38 daily x 40 days $6,575.20
Total: $2,307.68 + $6,575.20 = $8,882.88 gross
If the employment contract is unenforceable for whatever reason (signed after the commencement of work, contract became obsolete because of the various promotion, a new employment contract without additional consideration) the Employer likely won't find out until after the Employer has terminated the Employee as this is when the employment contract will be put under a microscope. At this time the common law entitlements will prevail.
Under the Common Law:
The same middle management employee of 20 years of service that is 58 years old will receive the following:
- 18-24 months' salary
Calculation: $60,000.00 divided by 12 = $5,000.00 per month
$5,000.00 X 18 months = $90,000.00
$5,000.00 X 24 months = $120,000.00
Total: between $90,000.00 and $120,000.00
Employer's often run into problems because they use a template employment contract as they become outdated very quickly. This can be one they have found online, or even one a lawyer has drafted but is out of date and no longer current to the court's evolving interpretation. There are various issues with this.
Employer's Common Mistakes:
- Employers often find template employment contracts online and decide to use those for their employment agreements. This is tempting because they are often quick and free to use, but it can cost employers a lot of money down the road if these contracts are ever challenged in a court of law. Template contracts are generally not enforceable as they are too ambiguous and do not cater to the unique employment relationship. Even if they appear to be valid at face value, the law changes and template agreements do not reflect this. Template employment contracts can be a dangerous and costly game for the employer.
- Employers will often have an employment contract drafted by a lawyer, but fail to have it updated. Using an out-of-date employment contract will likely mean that it would not be enforceable in a court of law.
- Employers often use the same employment contract template for each employee. This is problematic because different positions need to have different terms that reflect the position. An Executive is likely to have a different termination package and more in-depth terms regarding non-solicitation, confidentiality or non-compete than a Student or Clerk position.
- When an existing employee's role changes, Employer's often forget to provide a new employment contract to reflect those changes in the employment relationship. This can be very dangerous and costly because when an employment relationship is fundamentally changed, the existing contract is considered null and void. Changes in the employment relationship also need fresh consideration to be considered valid.
- The initial hire of a new employee can be a busy time, and sometimes employers forget to have the employee sign an employment contract before they begin. The rush to have the employee start may seem more important than sorting out the documentation, but it can be a very costly mistake. If an employee signs the employment contract after they have started working without new consideration, then the contract is null and void.
As the interpretation of termination clauses changes, it is important to seek legal advice in drafting employment contracts. An error, even as small as a technical mistake, can be very costly for employers. Therefore, it is crucial that employers understand their employment contracts and work with a lawyer knowledgeable in Employment law such as our firm to develop proper employment contracts and protections for themselves and their employees. If an employer's employment contracts are not up to date and, then it can be very costly if a court determines a wrongful dismissal, especially when common law notice or pay in lieu are ordered. At Suzanne Desrosiers Professional Corporation, we offer training on employment contracts. We can also help draft employment contracts and/or policies. Contact our office today for a consultation.