In Canada, every employment relationship is governed by a contract.

Although some employment contracts are written, setting out the terms and conditions of employment, the majority are verbal, comprised of the terms explicitly discussed with the employee, such as position and compensation, along with other terms implied by law.

The terms implied by law are designed to protect the employee. They include the requirement to provide “reasonable notice” upon termination of employment, which can be a significant cost of doing business.

Contracts help reduce such costs, minimize liability, provide certainty, and are an opportunity to set out the expectations of the employment relationship. We regularly advise our clients to use employment contracts for all employees — not just executives — and to have policies in place. It is the single most effective tool available to you, as it can help to eliminate some of the obligations that would otherwise be imposed by law, such as “reasonable notice” of dismissal.

Key Contractual Terms

• Termination

The cost of terminating an employment relationship can be substantial and unpredictable, and unfortunately it often comes at a time when organizations are trying to cut costs by downsizing. We can help you control those costs.

In Canada, employees are entitled to notice upon termination without cause. This entitlement has two distinct sources. The first is Employment Standards legislation, which varies somewhat from jurisdiction to jurisdiction but in all cases sets out the absolute minimum that employees are entitled to. It is based solely upon the length of service. Employers cannot contract out of the legislated minimums.

1. The second source is the common law, which provides that all employees are entitled to “reasonable notice” of termination. It is not, despite the common myth, one month per year of service. In assessing reasonable notice, courts have repeatedly said that no one factor (such as length of service) is determinative, and that all relevant factors should be considered. The core factors are:
2. The employee’s age.
3. Length of service.
4. Position/character of employment.
5. Availability of comparable employment.

Other relevant factors, such as inducement, will also be considered. Note that common law notice includes statutory requirements.

Common law notice, unlike the legislated minimums, can be displaced by contract. This means that you can use contracts to limit your obligations upon termination to as little as the legislated minimums (though we do not necessarily recommend doing so in all cases — offers should be tailored to the position). This is significant because an employee’s common law entitlement is typically much higher than the statutory entitlement. For example, an employee with 20 years of service may be entitled to common law notice of 18 or even 24 months, but only eight weeks of statutory notice.

Moreover, by default, employees are entitled to receive all of the compensation that they would have received had they continued to work during the notice period, including not only base salary, but also commissions, bonuses, benefits, and perquisites such as phone and car allowances. Employers can further minimize costs by drafting contracts to explicitly exclude certain types of compensation during the notice period.

To read our blog post on this topic, visit http://blog.firstreference.com/termination-clauses/.

• Compensation

You can also use contracts to clearly and unambiguously set out the individual’s compensation, and retain as much discretion as possible (e.g. stating that any bonus payment is discretionary and that there is no guarantee of any payment from year to year). Regardless of what you decide to offer, it is important to ensure the provisions are clear, as any ambiguity will be interpreted against the employer’s interests.

For some employees, such as those in sales, variable compensation such as bonuses and commissions are a significant component of their total compensation. It is important for both parties to be on the same page regarding the compensation structure. For instance, imagine a contract which states that the employee is entitled to receive 15 percent commission on all of her sales. When is the 15 percent commission triggered? What if the employee brings in a customer, goes away on vacation the next day, and her co-worker closes the deal? Is she still entitled to the commission? What if the sale is a repeating one — do they get commissions on renewals? The criteria that trigger the commission should be clearly set out to avoid any misunderstanding or future liability.

• Nature of Relationship

In some cases, sales personnel will be employees, whereas in others, you may want to contract with an independent salesperson. Independent contractors do not have the same rights and protections as employees do, and the misclassification of workers can expose employers to significant liability.

Courts consider various factors to determine whether a worker is an employee or an independent contractor, including the worker’s degree of control, financial risk, and responsibility for investment and management. Ultimately, they are assessing whether the individual is truly in business for themselves, or a part of the organization. No matter how well drafted an “Independent Contractor Agreement” might be, courts, tribunals or agencies like CRA will look at the underlying facts to determine the true nature of the relationship.

The contract should clearly set out the nature of the relationship and the degree of control and integration, and it must be consistent with reality. If the worker is truly an employee, you will be better off using a well-drafted Employment Agreement.

To read our blog post on this topic, visit https://www.rudnerlaw.ca/dont-judge-relationship-title-misclassification-employees-contractors-2/.

Implementing Binding Contracts With Consideration

Unfortunately, many employers spend time and money drafting strong employment contracts and then fail to implement them properly, resulting in a contract that is not worth the cost of the paper it is printed on.

In order to create a binding contract, there must be offer, acceptance and consideration — that is, both parties must receive some sort of benefit from the other. In theory, the fundamental basis of an employment agreement is that the employee agrees to work in exchange for pay. However, what if the employee has already been hired?

In recent years, courts have repeatedly scrutinized employment contracts and, in several cases, they have been found to be invalid. The most common mistake is to have the employee sign the contract at the time (or after) they commence employment. At that point, the individual already has a job and is probably not receiving any new benefit by signing the contract (which is for the employer’s benefit). If the contract is challenged, it is likely to be found unenforceable.

The best time for employers to present the written contract is when they make an offer of employment. There should be no agreement — verbal or written — until the employment contract is signed; otherwise, employers run the risk of having an unenforceable contract.

Creating Enforceable Termination Clauses

When drafting termination clauses, employers should ensure that they are as clear and unambiguous as possible, and that they comply with applicable legislation. The obligation to provide reasonable notice can only be displaced with absolutely clear language. Furthermore, courts have held that a breach — or potential breach — of the employment standards legislation will render a termination clause invalid. Thus, employers would be wise to use a “saving provision” explicitly stating that if the clause currently or in the future falls below the minimum statutory requirements, then it should be interpreted so as to comply with those obligations.

The termination clause, if drafted properly, can easily save you tens of thousands of dollars.

Contracts for Existing Employees

We are often asked what to do about existing employees that do not have contracts. Generally, there are two ways to introduce contracts for existing employees:

• Negotiate a new agreement by providing consideration such as a promotion, raise, bonus, or additional benefits (promotions or discretionary salary increases are great opportunities to implement a new contract); or
• Provide appropriate notice of the change (this approach effectively terminates the existing employment and establishes a new one by providing the same notice provided for dismissal without cause).

Employers must remember that the test is not whether the employee signs the contract, but whether the contract will be enforceable if and when it is challenged.

MANA welcomes your comments on this article. Write to us at [email protected].