Employment Contracts

When people agree to a new job it is often with a sigh of relief: the job hunt is over, the interviews are over, the salary negotiation is over, it's now time to start working. There is an important part of the process, however, which is frequently overlooked. In the excitement to start a new position job seekers often jump at the chance to work without a great deal of thought to the long-term consequences of the employment agreement.

Some Key Terms

These include: reasonable notice of termination, termination with or without cause and constructive dismissal. It is important to understand the terms included in a contract from the outset.

Termination with cause applies when an employer is justified in ending its contract with the employee. The test is a high one. The employee must have acted, or failed to act, in a manner that violates the employment contract. This could be an act of habitual neglect of duty, dishonesty, theft, fraud, conflict of interest, incompetence, disobedience, or insubordination. If work performance is the concern the employer will have to give warning to the employee and an opportunity to improve. Termination without cause refers to a situation where the employer does not have a valid reason to end the employment contract. The employer may terminate the contract but they must provide reasonable notice to the employee the contract is ending. The employee is entitled to be paid up to the date given by the employer. If the employer does not have cause for termination it must give sufficient notice or compensation in lieu of notice.

Constructive dismissal describes a situation where an employee is given work that is substantially different from that which they were hired to do, and this work, when looked at objectively, effectively constitutes a demotion: either in pay, in the level of responsibility, the challenge of the work, etc. A constructive dismissal is a breach of contract. When signing your contract, care must be taken to ensure no provisions allow the employer to change the nature of your work without further negotiations.

Employment Term: An employment agreement is either a definitive term or an indefinite term contract.

Definitive Term Contracts: Definitive term contracts provide for a fixed period of employment or a specific task. If the employer terminates the employment prior to the end of this term, the employee will be in a position to sue for damages as a consequence of being prevented from working to the end of the contract. Damages most often include any loss of income and benefits that the employee would have received. Damages are generally assessed for the remaining period of the contract at the time of its breach.

Regulation 288/01, subsection 2(2)(b) of the Employment Standards Act, 2000, indicates a term or task employment agreement which exceeds twelve months is deemed to be indefinite employment. This is important because it means a contract of employment providing for a fixed or definitive term greater than twelve months can only be broken when common law notice is paid.

Indefinite Term Employment Agreements: Where an employment contract does not provide for a fixed term or task, it is an indefinite term. At the termination of an indefinite employment agreement an employee is entitled to notice of termination of employment (inclusive of the minimum requirements set out within the Employment Standards Act, 2000) or payment in lieu of notice. An employee's right to common law reasonable notice may be limited by mutual agreement through a written employment contract.

Signing the Contract: Employees must read the employment agreement. Where an employee is handed a document prior to commencement of employment or asked to sign forms containing a myriad of provisions, but did not read the document before he or she signed it, the document may not be legally enforceable.

Consent to the terms of an employment contract must be given freely, voluntarily, and fully. Consent obtained though abuse of authority or coercion does not create an enforceable contract of employment.

A contract signed after the commencement of employment, without consideration, may be unenforceable. Consideration is necessary for any contract to be legally binding. It must be something of value such as money, an act, an agreement not to perform an act, or another promise. When a new contract of employment is signed after commencement of employment, it is important to ensure additional consideration is given by the employer to the employee (e.g. a bonus, promotion or raise, etc.).

Employee Handbook/Employment Policies: Prior to commencement of employment employees should be provided with copies of all rules and regulations they will be subject to.

Responsibilities

The employment contract may specifically detail the duties and responsibilities the employee is expected to perform. An employee has a right to expect their duties and responsibilities will not be unilaterally altered during the course of employment. Special attention should be paid to ensure the employer is precluded from altering the employee's position without negotiating the new term first. Terms which allow the employer to change an employee's duties and responsibilities may hinder claims of constructive dismissal.

Employee Benefits: Employees should be provided with copies of all company benefit plans prior to commencement of employment and execution of the employment agreement.

Stock Option Plans: Employees should be provided with copies of all stock and/or share option plans prior to commencement of employment and execution of the employment agreement.

Case law establishes, subject to specific wording within the employment agreement or share option plan, Courts will assume that the right to exercise and vest stock options survive during the notice period. Courts are predispositioned to interpret clauses and share option plans in favour of the employee. Language precluding vestment or exercising of shares after notice of terminate must be clear and unequivocal. Absent specific language limiting the right to exercise options the clock starts ticking following receipt of the common law notice.

Generally Courts are suspicious of terminations which result in the denial of the right to exercise stock options and may look at conduct that supports an "unpure" motive on the part of the employer in terminating the employee.

Salary Increases, Raises, and Bonuses: Timing of salary increases and payment of bonuses may be reduced to writing. If this is something you intend to rely upon, getting it in writing will help ensure the employer fulfills any promises.

Probationary Periods: Probationary periods allow for a period of adjustment when both the employee and employer can assess the candidate's suitability for employment.

Probationary periods are not appropriate when:

a) the employee has been induced to leave permanent, secure employment in order to commence employment with another employer; and/or

b) the employee is a senior, executive or professional employee.

Pursuant to the Employment Standards Act, 2000, employees who are terminated and have been employed with an employer for less than three months are not entitled to notice of termination (see subsection 54(1)). If the probationary period is longer than three months the employee is entitled to the Employment Standards Act, 2000 as well as the common law unless the contract clearly indicates differently.

Recent decisions in Ontario, have indicated it is improper for an employer to dismiss a probationary employee before the employee is given an opportunity to demonstrate their ability. The employer must provide a fair evaluation, warn an employee their job is in jeopardy, and provide the employee with a reasonable opportunity to correct any deficiencies. Some cases have even indicated that an employer must provide an employee assistance with improving performance. In the event of unsatisfactory performance, a clear warning is required such that the employee is made to understand both the shortcomings of their performance and the possibility of discharge if performance is not improved. The most recent trend with respect to probationary employees is that there be a "fair, honest and valid assessment" of an employee's competence and, an employer's conclusion to terminate must be reasonable and properly motivated.

Confidential Information and Intellectual Property

Employees should be provided with copies of all policies regarding Confidential Information and Intellectual Property prior to the commencement of employment and execution of the employment agreement.

It is important to remember that information generally known to the public through publication or other means is not confidential. Any business methods not exclusively used by an employer, but used for an industry, are not confidential. Customer lists and price books acquired through public sources is not confidential information. Information that comes into the hands of an employee without any badge of confidentiality is not protectable.

Non-Competition

Depending on the nature of the position, an employee may have an obligation not to compete with his/her employer or to solicit their customers or other employees following the end of employment. Most employees do not owe these obligations in the absence of an express term within the employment agreement. A written employment agreement gives the employer an opportunity to impose non-solicitation and non-competition obligations on key employees who might otherwise not be bound by them. It also enables the employer to define those obligations in the context of the particular employment relationship.

A non-competition clause, or restrictive covenant, between an employee and an employer is a restraint in trade and unenforceable unless it is demonstrated that the employer has legitimate business interests to protect and the restraint is reasonable - both between the parties and in the broader public interest. Courts will consider the following factors when determining if an agreement is enforceable:

a) Does the employer have a legitimate proprietary interest worthy of protection?
b) Is the restraint reasonable in terms of:
i) Duration?
ii) Spatial Limitations?
c) Are the terms of the covenant clear, certain, and not vague?
d) Is the covenant reasonable in terms of the public interest?

When assessing a non-competition agreement a good "rule of thumb" is the period of enforcement should not exceed the time period of an employees' right to common law reasonable notice.

The party seeking to enforce a restrictive covenant must demonstrate it is reasonable. The party seeking to avoid its application must prove the restrictive covenant violates the public interest. Non-solicitation covenants are generally easier to enforce than non-competition covenants because customer lists clearly belong to the employer and are usually critical to its business interests. Also, a departing employee is better able to earn a living subject to a restrictive covenant which prohibits contact with the former employer's customers, suppliers or employees than one which prohibits employment with a competitor.

The enforceability of a non-competition covenant is questionable when an employee is dismissed, allegedly for cause, and therefore does not receive any pay in lieu of notice of termination. Courts are loathe to restrict an employee from working for a competitor pending a determination about the existence of just cause, when he or she may otherwise have difficulty finding a job and is without income.

Changes in Control

An employee who has substantial leverage in negotiations may bargain for compensation in the event there is a change in control (such as a merger or sale of the business) and, as a result, the employee decides not to stay with the company or is dismissed. Such provisions are sometimes referred to as "golden parachutes". Compensation can include the pay in lieu of notice of termination provided for in the employment agreement, an additional lump sum payment or salary continuance, acceleration of stock options, and other items. The employment agreement will define what constitutes a change in control.

Termination of Employment

There are three ways of addressing reasonable notice upon termination of employment within an employment agreement. These include:

1. Employment Standards Act, 2000: When an employer desires to limit an employee's entitlement to the Employment Standards Act 2000 minimums, the following principles apply:

a. If the contract provides for notice less than that required by the applicable Employment Standards Act, the provision will be null and void;

b. The contract must specifically indicate the province's Employment Standards Act applies. If it merely says, "provincial law", without naming the act, it is not clear enough; and

c. Legislation which indicates a minimum right (such as Ontario) does not oust common law entitlements.

2. Set Term: The contract of employment may provide for a set notice period such as six (6) months terminable at the end without notice.

3. Common Law Notice: The employment contract may provide for reasonable notice upon termination of employment. Common law notice is assessed on a case-by-case basis.

Where an indefinite employment agreement fails to mention an entitlement to notice, the employee is entitled to reasonable notice of dismissal pursuant to the common law.

Other factors considered when assessing what is reasonable notice of termination include:

• inducement
• bad faith
• breaks in service
• failure to provide letter of reference and/or verbal references
• disability
• discrimination
• improper cause allegations
• manner of dismissal
• limited formal education and skills
• short-term employment
• temporary employment
• Probationary period

Mitigation

Under the common law, an employee must minimize, or "mitigate", damages resulting from the termination of his/her employment by making reasonable efforts to secure comparable employment elsewhere. An Employer may deduct any money earned during the reasonable notice period from the damages to which the employee is entitled, subject to the Employment Standards Act, 2000 minimums.

The employment agreement may address the effect of mitigation on notice of termination or payment in lieu thereof. If the agreement is silent on this issue, a court may find the employee is entitled to the full amount of pay in lieu of notice regardless of whether the employee earns other income during the notice period. This is generally the case where a contract requires payment of a lump sum amount. Alternatively, where the agreement provides for salary continuation payment is usually terminable upon securing other work.

Conclusion

Being aware of your rights as an employee will help ensure they are protected. Through careful consideration an employment contract can be used as a tool to set reasonable expectations which will assist throughout the employment relationship. It is also your insurance you will be taken care of if things go wrong.