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Employment contracts and termination clauses

Employment contracts and termination clauses

Yosie Saint-Cyr LLB, Managing Editor, HRinfodesk, published by First Reference Inc., March 2014

Does your organization require all new employees to sign an employment contract with a termination clause? According to 138 (51%) respondents out of a total of 271, their organizations do; 94 (35%) do not and 39 (14%) have employment contracts for certain employees.

Every employment relationship is a contract, whether it is written, verbal or a combination of both. When an employee is hired, the employer and employee make an economic exchange, which is in effect a contract. Simply put, an employment contract is an agreement between an employer and employee regarding the terms and conditions upon which the employment is based.

It is extremely important to draft a thorough employment agreement that protects the employer and those acting on behalf of the employer. This goal can be accomplished by seeking legal advice and specifically tailoring agreements to apply to the employer and its operations.

Unwritten employment contracts

In an unwritten employment contract, the terms and conditions of employment are covered by a variety of laws such as employment standards, human rights, occupational health and safety, labour relations and workers' compensation legislation. Contracts, whether written or not, must meet the minimum standards set out in legislation and be valid at common law, which is that body of law that results from court decisions.

Over and above legislation, any promises an employer makes to an employee, such as a promise to give a raise after a specified period or other items that may be contained in an employee handbook or employee benefits booklets, etc., may form part of the contract.

Written employment contracts

When you decide to hire a new employee, you make an offer of employment. This offer can be verbal or written. A job offer letter serves as the legal basis for the employment relationship and is a valuable document during a dispute. A formalized offer letter confirms the details of the job offer that were negotiated with the successful candidate verbally, by email or in formal letters, or established through company policy, practices and procedures. This offer letter will accurately capture the intentions of the organization and clearly express them to the prospective employee.

Any employer can use a written contract for any non-union employee. Unionized employees are covered by the terms of a collective agreement negotiated between the union and the employer. Negotiated collective agreements, of course, are contracts between an employer and groups of employees (bargaining units), and are governed by the Labour Relations Act of a province or territory.

In circumstances where the terms and conditions of employment vary little from legislated minimum employment standards, a written employment contract is usually unnecessary. A job offer letter under those circumstances is sometimes a sufficient form of agreement. A job offer is a binding contract between the employer and employee and regulates the employment relationship between the employer and employee in the same way as an employment contract. To ensure the job offer is enforceable, the job offer outlining the essential terms of the agreement must be established prior to the employee starting his or her position.

Written employment contracts are a good idea, and in many cases, a necessity for employees whose terms and conditions of employment differ significantly from legislated minimums, such as an employee who is offered a senior or management position, or who will have access to confidential and/or proprietary information, which, if disclosed, could have a detrimental effect on the employer.

Written employment contracts/job offers are frequently used to:

a) ensure there are no misunderstandings between the employer and employee about the terms and conditions that will apply in the employment relationship;

b) set a specific term of employment (fixed term contracts of less than twelve (12) months attract no notice or severance (if applicable) requirements under the Employment/Labour Standards Acts);

c) specify and detail the terms of separation;

d) protect an employer's confidential and proprietary information and/or establish non-competition or non-solicitation restrictions on the employee in the event of termination;

e) detail more complicated pay structures, including salaries, commissions, bonuses, profit sharing, stock options, etc.

A contract must be mutually agreed upon. A contract signed by an employee under coercion or duress would not be upheld if successfully challenged in court. Therefore, it is a good idea to allow the employee sufficient time to seek legal advice prior to signing the contract/letter and to reference this in the contract itself.

A written job offer letter or employment contract ideally includes all of the terms and conditions of employment, as well as a process for amending the contract by mutual agreement. Many employers have policies that cover many of the terms and conditions of employment, and these can be referenced rather than repeated in the contract. However, key terms and conditions such as compensation, termination, confidentiality, non- competition, non-solicitation and any other terms specific to this employee, should be set out in writing in the contract, since the employer would have to prove in court that the employee was made aware of and understood the terms prior to signing the contract.

Clear and unambiguous language is the key to a written employment contract/offer letter standing up against a court challenge.

Termination clauses

One of the most important clauses in an employment contract is the clause dealing with the termination of the employment relationship. An employee's contract may limit/stipulate the ability to provide working notice, or the extent of such notice. A contract without a termination clause would be subject to common law reasonable notice of termination if successful in court. Having termination provisions clearly set out in the contract allows the employee to understand behaviour expectations, the process of termination and the method for calculating notice and severance (if applicable). It also allows the employer a sense of certainty should termination of the employment relationship be necessary.

There is definitely a presumption that, unless there is an agreement with express language to the contrary, an employee is entitled to reasonable notice of termination. Note that the employment /labour standards legislation only sets out the minimum notice required.

It is advisable to include termination language for both "just cause" and other situations. "Just cause" should be defined broadly or refer to common law. Even with a contract, employers will carry the burden of proving they had "just cause" to terminate the employee if challenged in court.

The amount of notice to be given and severance (if applicable) to be paid should be quantified. Notice can be working notice where the employee continues to work through the notice period, or it can be pay in lieu of notice where the employee is terminated immediately. Notice is usually a number of weeks or months based on length of service as stated under the Employment Standards Act. Make sure the termination clause contains the minimum notice and severance (if applicable) required under employment/labour standards legislation. These minimums cannot be lessened, even by an agreement between an employer and an employee. The contract must specifically provide that the employment/labour standards legislation of your jurisdiction applies. It should not simply say "provincial law." It must name the legislation.

A very recent decision of the Ontario Court of Appeal has held that an employment contract that fixes the period of notice upon termination without cause, but makes no specific reference to mitigation, does not attract the obligation to mitigate that typically attaches to the common law notice. The Court also clarified, from a practical perspective, that where parties intend that mitigation is to apply in cases where an agreement specifies a fixed amount of notice, they must express this intention in clear and specific contractual language. Note that pay in lieu of notice is subject to the employee's duty to mitigate his or her damages by seeking new employment, except for employment standards termination pay and severance pay (if applicable)-there is no duty to mitigate for these amounts.

If there will be a possibility of temporary layoffs due to shortage of work, a clause should be inserted in the agreement. This is required if you want to avail yourself of the temporary layoff provisions under employment/labour standards legislation.

Last words

It is essential that the employee is provided with time to consider the agreement, ask questions and obtain legal advice.

The contract must be signed and dated by both parties and those signatures should be witnessed by someone who has no interest in the agreement.

Recent case law sends a clear message that if an employer wants particular terms of an employment contract to be enforceable, the terms must be clear and the employee must sign the contract before his or her first day on the job. This concept also applies to oral employment agreements-the essential terms of the oral agreement must be established prior to the employee starting his or her position.

A signed contract can limit termination notice to the minimum standards found in employment/labour standards legislation. However, employers must make sure to set out the limits in a manner that is clear and not ambiguous. Thus, it makes good sense to ask an employee to sign a contract or at best an offer of employment letter.

Source: The Human Resources Advisor, published by First Reference Inc.