Dental Practices and Employment Law

Dental Practices and Employment Law

By Melynda Layton LLB

As Presented to the Royal Bank of Canada, 2005.

Buying or selling a practice is an important event in the career of any dentist. It marks a time of great change and of new beginnings. Both purchaser and seller will have many important decisions to make. The purchaser is shopping for a suitable practice to start with or to expand her existing practice. She will be thinking primarily about price, location, operating costs, number of patients, and the assets of the practice, to name just a few considerations. The seller will be thinking about the life awaiting him after the sale and hoping to get the highest price for his practice to achieve that life.

Neither of these parties can afford to forget their obligations as an employer. Obligations towards employees or independent contractors are enforceable after the sale of a practice.

Both parties must consider how the sale will affect the workers. Each must decide whether it is important the employment relationships survive the sale, and if so, whether they will survive unchanged. Depending on the purchaser’s intentions, the vendor must review the employment contracts to determine how the sale will affect his obligations: will he have to give notice to his employees that their contracts are coming to an end? The purchaser must decide whether he wishes to keep the seller’s staff. In the event staff are kept it is important to be aware of his obligations as a successor employer to the vendor’s employees.

Determining the value of a practice is a tricky affair. An average patient can be worth a considerable amount of revenue throughout the lifetime of a dental practice. Yet, there is no guarantee patients will stay with the purchaser. Maintaining continuity can be crucial to the success of a practice after it has changed hands; client satisfaction often depends on retaining competent help.

This paper is designed to assist dental professionals purchasing or selling a practice. Whether you are a vendor or purchaser, you should understand your obligations in order to help you during negotiations.

What is being sold?

The purchaser and seller must come to an agreement as to what is being sold. Is the entire practice for sale? Will the employment contracts form part of the sale? Is the office space part of the deal? Is it only the patient list and good will of the seller being offered?

If the employment contracts are not being sold then the sale of the practice will bring the employment relationship to an end. Under this scenario the vendor is required to terminate the employment relationship in accordance with both the common law and the provincial legislation (the Employment Standards Act, 2000¹). Reasonable notice must be given to the employees that the contract will come to an end.

Generally the purchaser is a successor employer and will “step into the shoes” of the seller unless notice of termination of employment is given. As a successor employer, the purchaser must honour the terms and conditions of employment. Both the express and implied terms contained within the employment agreement will apply. This includes seniority rights, vacation allowances, benefits, job descriptions, etc. which all pass with the sale. If the purchaser decides to change the contracts the applicable laws of Ontario must be abided by.

Which Legislation Applies to Dental Practices?

In addition to the laws regulating the dental profession, such as the Dental Hygiene Act, 1991, the Dental Technology Act, 1991, and the Dentistry Act, 1991, there is legislation of general application to dentists as employers.

The Ontario Human Rights Code

All employers must comply with the Ontario Human Rights Code (the “OHRC”).² It is contrary to the legislation to discriminate against an employee, or potential employee, because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, marital status, same-sex partnership status, family status or disability. Similarly, an employer or co-worker may not harass an employee on any of these grounds; this of course includes sexual harassment. It is your responsibility as an employer to keep your workplace free from harassment and discrimination by and towards all your employees. The best way to comply with the law is simple: treat all employees fairly and equally.

The Employment Standards Act, 2000

The Employment Standards Act, 2000 (the “ESA”)³ establishes a minimum collection of rights which every employment contract must conform with. The legislation governs such matters as employee wages, hours of work, overtime, public holidays, vacation pay, leave of absences, termination pay and severance pay. Neither employers or employees can contract out of or waive the statutory minimums.

The Workplace Safety and Insurance Act

This act creates a no-fault insurance system for workplace or work-related accidents. Dental practices are not required to have coverage under this act, but they can apply or “opt in”. The employer must report their payroll to determine how much they must pay for this coverage. In case of an accident, the employee is compensated by the Workplace Safety and Insurance Board and is prevented from taking any legal action against their employer. You cannot pick and choose whom you wish to cover; coverage is purchased for all employees at the workplace if the decision is made to opt in.

The employer needs to determine if WSIB coverage or private insurance suits their needs. This decision would likely consider how many people require coverage. Private insurance may allow for insurance on an individual basis rather than all employees.

Defining the Employment Relationship

Most commonly a dental practice will include assistants, hygienists, and perhaps associate dentists. These workers are employed as employees or independent contractors.

It is crucial to distinguish between an employment relationship and an independent contractor arrangement as the rights, obligations, advantages, and disadvantages are very different for each.

Non-standard employment relationships offer an array of benefits including increased flexibility and controlled labour costs that benefit both employers and workers. However, as employment relationships grow more elastic they have also become more complex. It is imperative parties wishing to enter into an independent contractor arrangement seek legal advice to ensure their contractual agreement is consistent with their working arrangement.

Whether a business organization assumes the role of employer or hirer of services, it must satisfy both Federal and Provincial legislative requirements. The consequences of incorrectly characterizing a work relationship as an independent contractor arrangement includes penalties, interest, director’s liability under the Income Tax Act of Canada as a result of the corporation’s failure to withhold and remit income tax on behalf of the employee, liability under the Employment Insurance Act as a result of an organization’s failure to withhold and remit employment insurance premiums, liability for Canada Pension Plan contributions, liability under the Workplace Safety and Insurance Act, and damages for reasonable notice when terminating the relationship.

The employment relationship can also determine who will be liable for damages when a tort has been committed against another party. An employer will be more likely to be held vicariously liable for an employee than for an independent contractor.

Defined most simply, parties engaged in an employment relationship are said to be in a contract of service, whereas parties engaged in an independent contractor arrangement are under a contract for services. This terminology provides little insight into the substantive nature of the relationships it describes. Moreover, legislation that endeavors to define what is meant by the terms “employee” and “employer”, more often than not, does so in a circular fashion. For example, an “employee” is frequently defined as a person employed by an employer, and in turn, an “employer” is commonly defined as a person who employs people.

When determining the nature of the working relationship between parties, courts have indicated four tests which must be considered. These include:

1. Degree or absence of control exercised by the “employer”.

Employment relationships imply some supervision or control over the worker. The question is not whether the alleged employer exercises control over the worker, but whether they have the right to exercise control. The “degree” of control is a factor of whether the worker:

• Works mostly on their own,

• Is free to accept or refuse other work, and

• Is required to work or attend the hirer’s place of business.

1. Ownership of tools

A worker may be considered an independent contractor if he/she owns his/her own tools. The same is true even if the hirer provides special tools when required.

3. Chance of profit and risk of loss

If the worker has a financial investment in the business over and above providing labour, this is considered a strong indicator an independent contractor arrangement exists. Unlike an employee, an independent contractor’s income fluctuates with the amount of work completed.

4. Integration of the “employee’s” work into the “employers” business

Is the worker an intrinsic part of the organization, or merely ancillary to it? Under a contract of service the worker is employed as part of the business and his/her work is done as an integral part of the business. By contrast, under a contract for services, an individual’s work, although a servant to the business, is an ancillary to the business.

There is no conclusive test universally applied to determine whether a person is an employee or an independent contractor. On the contrary, the decision-maker must examine the relationship between the parties in totality. The central question is whether the person who has been engaged to perform services is doing so on his/her own account. All four (4) indicators taken together, suggest which arrangement is more likely.

The Employment Contract

Both the purchaser and vendor must be aware of pre-existing employment contracts. Employment contracts need not be written. The existence of an employee/employee relationship, de facto, creates a contract. Neither the employer nor the employee can contract out of the provisions of the ESA.

The time of purchase is a perfect opportunity to put new employment contracts into place. The purchaser can negotiate with the seller which employees she is prepared to offer employment to. Prior to commencement of employment with the purchaser, in exchange for continued employment, a new employment contract could be offered taking effect at the time of sale. The threat of termination, in the event the offer is not accepted, is imperative.

Consideration is necessary for any contract to be legally binding. It must be something of value such as money, an act, or an agreement not to perform an act.

When a new contract of employment is signed after the 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.). It is arguable that a contract signed after the commencement of employment without consideration is unenforceable.

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.

Clarity of contract is essential to a successful working relationship; this will ensure both parties know their legal rights both during employment and after it ends. Some typical clauses in employment agreements include:

1. Duties and Responsibilities of the Employee

An employee has a right to expect his/her duties and responsibilities will not unilaterally be altered upon commencement of employment. A precise job description avoids future disagreement. Attaching a schedule to the contract outlining duties and responsibilities is a convenient way to insert this into the contract. Some flexibility should be reserved in order to allow the employer to alter responsibilities where appropriate.

2.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.

Under 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 payment on account of notice of termination (see subsection 57(1) of the ESA). If the probationary period is longer than three months, the agreement should provide that the employee will only receive minimum notice of termination as described in the legislation

Recent court decisions in Ontario have held that it is improper for an employer to dismiss a probationary employee before the employee is given an opportunity to demonstrate his/her ability. The employer is further obligated to provide a fair evaluation and to warn an employee that his/her job is in jeopardy and provide that employee with a reasonable opportunity to correct any deficiencies, prior to a dismissal. Some cases have even indicated that an employer must provide an employee with assistance improving his/her performance. In the event of unsatisfactory performance, a clear warning is required such that the employee is made to understand the shortcomings of his/her performance, and that there is a possibility of discharge if the 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 that, further, an employer’s conclusion to terminate must be reasonable and properly motivated. Consequently, it is important probationary terms be strongly defined so as to minimize an employee’s entitlement to damages in the event the relationship does not work out.

3. Non-Competition or Non-Solicitation Clauses

A non-solicitation clause is designed to protect an employer’s client or customer base. A non-competition clause is more restrictive and attempts to keep the former employee from working within certain defined parameters. 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 upon cessation of employment. Most employees do not owe fiduciary obligations in the absence of an express term within the employment agreement.

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 patient or client 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. Courts are loathe to restrict an employee from working for a competitor pending a determination about just cause.

Courts tend to find non-competition clauses unnecessarily restrictive and prefer non-solicitation clauses. Consider the Ontario Court of Appeal case of Lyons v. Multari.⁴ Dr. Multari worked with Dr. Lyons, an oral surgeon in Windsor, under a contract containing a non-competition clause which was to cover a time span of three years and a geographical range of five miles. When Dr. Multari left (six months later) and opened an oral surgery practice less than five miles away, Dr. Lyons commenced an action for breach of the non-competition clause.

The Court of Appeal concluded Dr. Lyons had a proprietary interest in the dentists who customarily referred patients to him and the five-mile/three year restriction was reasonable. This was not sufficient, however, to render the covenant enforceable. Dr. Multari knew the names of the referring dentists consequently a simple non-solicitation covenant would have prevented him from soliciting those dentists.

The Risks of Altering an Employment Contract

Altering an employee’s employment contract requires careful planning. If an employee is not happy with the changes this may affect job performance or they may look for alternate employment. Where the changes materially alter the employment relationship an employee may claim constructive dismissal and entitlement to damages.

Where an employer acts in such a way as to alter the terms and conditions of employment, an employee may be entitled to regard the employer’s conduct as a termination. This may occur where an employer has demoted an employee, changed the work they are required to do, taken away certain privileges, reduced their pay, or made any change that substantially alters the terms and conditions of employment.

When changing duties and responsibilities the employer has the right to assign alternative duties to the employee so long as they are compatible with the job the employee was hired to do. To guard against constructive dismissal an employer should preserve the right to make changes in the employment contract. This flexibility may be provided within a written contract or may be stipulated in personnel policies which are incorporated into the employment agreement. Wherever possible an employer should refrain from promising an employee narrowly defined set of job duties.

Despite changes to the employment contract an employee may be required to remain in the altered position to fulfill their duty to mitigate their damages. In circumstances where the salary is the same, where working conditions are not substantially different or the work demeaning, and where personal relationships involved are not acrimonious it is reasonable to expect the employee to remain employed.

An employer may also minimize the potential of a constructive dismissal claim by giving advance notice of the changes. The reasoning in this regard is that an employee is entitled to a reasonable notice of termination. Just as an employer may give actual notice of termination, so too it may give notice of a fundamental change. Provided the notice given equals or exceeds the length of the applicable common law period an employee will not be entitled to damages.

While an employer’s right to alter the terms and conditions of employment is not exhaustive employers may make changes so long as they are reasonable. Where the position is significantly altered the employee should be advised in writing and consent sought. The date the changes will take effect should be clearly set out in the agreement.

Alternatively a new employment agreement could be offered along with additional consideration such as a bonus, a promotion, or an increase in pay. By offering something new in exchange for the agreement an employer increases the likelihood of its enforcement.

If consent or “new consideration” is not an option notice of the changes to the employment contract will minimize the risk of a constructive dismissal claim. By indicating the new contract will take effect at a future date, the employee is given time to find new work if they do not accept the changes. Notice should reflect the time the employee would receive if their employment was terminated. When calculating notice particular attention must be paid to the Employment Standards Act, 2000, and the common law. Though the legislation gives a minimum of one week’s notice per year of employment to a maximum of eight weeks, courts will determine the package period on a case-by-case basis taking into consideration such factors as character of employment, length of service of the employee, age of the employee, and the availability of similar employment.

Giving notice is slow; it is not a practical business solution where there is an urgent need to alter duties. Where there is a sense of urgency an employer could implement the changes in the hope they will be found to be reasonable. Though you risk a constructive dismissal claim. So long as the work is not humiliating, embarrassing, or a significant reduction in pay an employee may have an obligation to continue to work in mitigation of their damages.

An employer can take steps to minimize the risk of a constructive dismissal claim by:

• Having an employment agreement in place allowing the employer to make changes to the terms and conditions of employment;

• Incorporating broad job descriptions which give flexibility to add or take away duties as required; and

• Including restrictive termination clauses in the employment contract thereby limiting the notice the employer is required to give the employee of a change.

Termination of Employment

If the sale of the practice does not include assumption of employees the vendor will need to terminate employment.

Where employment is terminated with cause the employee is not entitled to notice or payment in lieu of notice. Cause for termination includes habitual neglect of duty, dishonesty, theft, fraud, conflict of interest, incompetence, disobedience and insubordination.

An employer cannot simply terminate someone’s contract because of poor performance. In Mansfield v. Vollmer,⁵the Plaintiff was awarded notice as a consequence of her dismissal from her position as a dental assistant.  The plaintiff had received a negative performance appraisal from the dentist who employed her and was told to improve in the next month. Before the month expired, her employment was terminated.  Having given her the month to correct her behaviour, the employer was bound to provide her with that one month.  The court held the Plaintiff was wrongfully dismissed.

An organization may always dismiss an employee without cause upon providing notice of termination or payment in lieu thereof. An employer must comply with its minimum obligations as established by the Ontario Employment Standards Act, 2000. Generally minimum notice requirements established by the ESA are reserved for lower level employees. Professional, executive, long-term specialized, skilled, etc., employees are entitled to notice in excess of the what the ESA provides unless there is a written agreement in place limiting their rights.

Reasonable notice upon termination of employment can be addressed within a contract, as follows:

a) Employment Standards Act, 2000

All employee’s are entitled to the ESA. When an employer desires to limit an employee’s rights upon termination to the ESA minimums, the following principles apply:

i) If the contract provides for notice less than that required by the provisions of the ESA, the provision will be null and void,

ii) The contract must specifically provide the ESA applies. If it merely says, “provincial law”, without naming the act, it is not clear enough, and

iii) As the ESA specifies a minimum notice shall be “at least” a certain period of time, then a clause that merely provides that notice will be in accordance with ESA is not clear enough.

b) Set Term

The contract of employment may provide for a set notice period such as six (6) months.

c) Common Law Notice

The employment contract may provide for reasonable notice upon termination of employment. Notice, pursuant to the common law, is assessed on a case-by-case basis. When assessing what constitutes reasonable notice of termination the seminal case is that of Bardal v. Globe & Mail,⁶ a 1960 decision wherein the Court noted, “there can be no catalogue laid down as to what is reasonable notice in particular classes of cases. The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to experience, training and qualifications of the servant.”

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

• whether inducement is a factor;

• bad faith;

• break 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.

Where an indefinite employment agreement fails to reference notice entitlements upon termination of employment, the servant is entitled to reasonable notice of dismissal under the common law.

Where employment is terminated with cause the employee is not entitled to notice, or payment in lieu of notice. Cause for termination may include habitual neglect of duty, dishonesty, theft, fraud, conflict of interest, incompetence, disobedience or insubordination.

Employee Benefits and Employer Policies

Neither the purchaser or seller can afford to forget about employee benefits during or after the time of sale. Under the Employment Standards Act, 2000 and at common law, all benefits must be continued during the notice period where there is dismissal without cause. It is good practice to ensure that all employees are provided with copies of all company benefit plans prior to commencement of employment and execution of an employment agreement. Employees should also be provided with copies of all policies, rules and regulations they will be subject to.

Conclusion

A carefully worded employment agreement signed prior to commencement of employment will help set employee and employer expectations from the inception of employment and minimize liability in the unfortunate event the relationship is derailed.

Through careful planning, employment contracts can be used as a tool to set reasonable expectations which will assist throughout the employment relationship and ensure that your practice provides the best service possible. They are also your insurance that all will be taken care of if things go wrong.

To ask a question or for further advice please contact Melynda at melynda.layton@careerlaw.ca or by telephone at 613-225-4400