I thought that was implied? How written employment agreements can protect your business

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Corporate Update

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This article briefly discusses how an employment agreement can protect your business and minimize employment-related liabilities, and identifies some of the pitfalls for employers to avoid.‎1

Valid employment contracts, like other contracts, are generally characterized by three elements:

  • Offer;
  • Acceptance; and
  • Consideration (the exchange of something of value by the parties)

Employment contracts can be written, verbal, or a combination of the two. The parties to an employment contract generally enjoy freedom of contract, subject to any limitations or requirements imposed by  applicable laws. Employment contracts are subject to both statutory law (e.g. provincial employment or labour standards legislation) and, outside of Quebec, the common (or judge-made) law.

Implied terms

Absent express terms, the common law implies certain terms and conditions in an employment relationship.

For example, employees have implied duties to the employer, including a duty of loyalty and fidelity, a duty to follow the employer’s lawful instructions, and a duty to not improperly use or disclose the employer’s confidential information. However, the extent of these duties is determined by case law and may not be sufficient to protect an employer’s interests. This is particularly true in the case of an employer’s confidential information or in the case of post-termination competition by an employee.

Similarly, under the common law an employer has an implied obligation to provide reasonable notice of termination of employment in the event of termination without cause.‎2‎ Depending on non-exhaustive factors including an employee’s age, length of employment, duties and responsibilities and the availability of alternative employment, reasonable notice under the common law can be as much as 24 months (or more in exceptional circumstances). Failure to provide reasonable notice (i.e. failure to provide working notice) gives rise to an entitlement to damages in respect of the employee’s total remuneration over the determined notice period, including salary, benefits, perquisites, pension benefits, bonus, and incentives (including equity incentives). Because the bar for “for cause” terminations is extremely high in Canada, in the case of long-term or niche employees the financial cost of a without cause termination can be significant.

However, an employee’s duties can be expanded and the implied right to reasonable notice can be limited or (subject to statutory minimums) eliminated by agreement between the parties. In this way, a carefully drafted employment agreement can be an important tool to protect the employer’s business and minimize employment-related liabilities.

Minimum standards

In addition to implied terms, provincial employment or labour standards legislation sets out the minimum standards for employment in a particular Canadian province or territory. However, unlike some of the implied terms, these minimum standards of employment cannot be waived by agreement.

Minimum standards set the floor for the terms and conditions of employment. If a term or condition of employment does not at least meet these standards the term and condition will be void and unenforceable. Accordingly, it is crucial that any terms and conditions of employment (and any express terms contained in an employment agreement in particular) comply with the standards imposed by applicable legislation. A term limiting or eliminating reasonable notice under the common law will not protect an employer if it does not comply with statutory notice requirements.

Canadian courts are trending towards requiring strict compliance with minimum employment standards and are more and more finding terms unenforceable to the employer’s detriment.‎3‎ Because labour and employment falls under the scope of provincial and territorial jurisdiction (unless an employer is a “federal work and undertaking” for constitutional purposes in which case federal law will apply), employment laws vary from jurisdiction to jurisdiction and an employment agreement which meets the standards of one province may run afoul of the standards of another province.‎4‎ It is therefore critical that Canadian employers do not take a “one size fits all” approach to employment agreements and ensure that the terms and conditions of employment reflect the requirements of the jurisdiction of employment.‎5‎ Seeking local support and guidance before moving into a new jurisdiction should be one of the first steps in a businesses’ growth plan.

All this being said, while statutory minimums are a floor, the law recognizes that these standards are not a ceiling. Consistent with freedom of contract, employers are free to provide, and in many cases do provide, a greater benefit.

Using policies and handbooks

Policies and handbooks are a useful way for employers to elaborate on the rules, processes, and procedures that apply to the employment relationship. And, while most written employment agreements will contain a term to the effect that an employee agrees to comply with such policies as the employer may introduce, policies and handbooks, on their own, are rarely sufficient to protect an employer’s business or minimize an employer’s employment liabilities.

Key terms and conditions of employment, including in respect of confidentiality, intellectual property, restrictive covenants, probationary periods and entitlements upon termination (including limitations on reasonable notice under the common law or severance arrangements) should be in an employment agreement where they can be put squarely before the employee. If such terms appear in policies and handbooks only, there is a material risk that they will not be enforced by the courts.

Ancillary agreements

In many cases employers use ancillary agreements to address specific aspects of the employment relationship. For example, some employers require employees to execute a stand-alone confidentiality and/or intellectual property agreement, and others require employees to execute agreements pertaining to grants of stock options, commissions or other incentives. Such agreements can be useful to address complex or important issues to the employer in a fulsome way. However, these agreements are governed by the same rules as any employment agreement, and should be incorporated into the main employment agreement by reference and put to and signed by the employee before the first day of work (or otherwise supported by fresh consideration as discussed below).

The power imbalance

The law recognizes an inherent power imbalance between employers and employees and may not enforce terms or contracts which are unconscionable. Employers should consider the utility of onerous terms or terms which, in effect, deny an employee a meaningful opportunity to exercise a particular right or entitlement as such terms may not be enforced. Similarly, employers should ensure that employees are provided with ample opportunity to review and obtain legal or financial advice on the terms of an employment agreement before being required to sign and return the agreement to the employer. Otherwise, the employee could take the position that he or she signed under duress or was denied a reasonable opportunity to obtain legal advice in an attempt to have the agreement set aside in the future.

Consideration (again)

Employment agreements, like all contracts, must be supported by consideration. However, in the employment context the timing of consideration is particularly important. In the case of a new hire, consideration (e.g. ‎the exchange of the promise to work with the promise to pay) is spent as of the employee’s first day of employment. Accordingly, it is critical that the employee be required to sign and return the employment agreement before the employee’s first day of work. If the employee does not do so the agreement may be void and unenforceable due to a failure of consideration.

In the case of an existing employee, offering the employee continued employment in return for the employee agreeing to the terms of a written employment agreement is generally not sufficient consideration. Where an employment agreement is implemented mid-employment term, the employer will have to provide the employee with fresh consideration, for example, a signing-bonus or something else of value, the provision of which is contingent upon the employee signing the agreement before the effective date.

Verbal representations

An employer who goes through the process of negotiating a written employment should include an “entire agreement” clause among its terms. While such clauses are often paid little attention as boilerplate, absent such a clause any discussions during recruitment or negotiations between the employer and employee may not be excluded from the employment agreement. This may give rise to disputes regarding the nature of any such discussions or negotiations, or may water down written terms intended for the benefit of the employer. As such, employers should include both an entire agreement clause and a clause that provides that no amendments to the employment agreement will be valid unless in writing and signed by the parties.

Food for thought

Written employment agreements take all shapes and sizes, and can range from a few key points to a sophisticated commercial agreement. In addition to the topics discussed above, employers should consider the following points when implementing written employment agreements for their business:

  • Who is the audience? Is the employee a sophisticated executive or does the employee occupy an entry level-role?
  • Will the employee be employed for an indefinite or for a fixed term?
  • Will the employee be subject to a probationary period?
  • Does the employer need to reserve the right to make changes to the employee’s duties and responsibilities, title, reporting relationships or location of work during the term? Employment relationships are dynamic and not static, and may need to change to address evolving business needs.
  • Is the employee required to devote his or her full time and attention to their role, or are they permitted to engage in outside employment or businesses?
  • What are the employer’s expectations of the employee? Will he or she be required to work fixed hours or will the employee be subject to a flexible schedule? Is the employee entitled to overtime under employment or labour standards legislation, or, if not, should the employee’s compensation be for any and all hours worked by the employee in the performance of his or her duties and responsibilities?
  • Will the employee be entitled to benefits or perquisites of employment, pension benefits, or bonus or incentives? What impact will the termination of employment have on the same?
  • Does the employee have an entitlement to commissions or other variable remuneration? How will this be calculated?
  • Will the employee be entitled to sick leave, paid time off or other leaves of absence, in addition to statutory leaves?
  • Is the employee a competitive threat, are post-termination restrictive covenants appropriate?
  • Is the employee going to be creating or developing intellectual property?
  • Will the employee have access to confidential information?
  • Will the employee be entitled to the minimum statutory notice and/or severance upon termination without cause, or will the employee be provided with additional severance compensation?
  • Does the employer require a certain amount of notice of the employee’s resignation?

Many of these issues could be the subject of their own article but consideration of the same is an important starting-point when developing written agreements.

Conclusions

Written employment agreements are extremely useful and highly recommended tools. However, like all commercial agreements, they should be implemented with a high degree of care to enable employers to use them to maximum advantage.



[1]‎ This article discusses the use of employment agreements in the common law provinces only and does ‎not address the use or regulation of employment agreements in the Province of Quebec.‎

[2]‎ “At will employment” is not recognized under Canadian law.

[3]‎ For example, in Waksdale v. Swegon North America Inc., 2020 ONCA 391, the Ontario Court of Appeal rendered a decision ‎that calls into question the enforceability of many termination clauses that, before the decision, would have likely been considered compliant with the Ontario Employment Standards Act, 2000

[4]‎ This is most evident in the case of termination clauses where the minimum standards for notice, pay in lieu of notice, severance and termination for cause or misconduct vary across Canada.

[5]‎ In addition to provincial employment or labour standards legislation, employment agreements must not run contrary to other provincial human rights legislation, including privacy, workers compensation, occupational health and safety, accessibility and pay equity legislation, as applicable.