Importance of Employment Contracts
The importance of having a written and executed employment contract is invaluable for both the employer and the employee as it provides a written account of the agreement between the parties and affords the parties a clearer understanding of their duties, responsibilities and obligations to each other in their employment relationship.
Employment contracts may be created through a verbal agreement or implied by the behaviour and conduct of the parties[1]. More often than not, employers will enter into a verbal agreement with their employees based on a handshake. Absent a written employment agreement, if a conflict arises between the parties particularly with respect to the terms of their agreement, the situation can very fast turn into the employer’s word against the employee’s. In such case, there is a real risk that the employer may be saddled with an obligation it never meant to undertake. Therefore, having a written contract of employment setting out clearly the essential terms of the agreement between the parties will go a long ways to curtail the possibility of a dispute between the parties later in their relationship.
Key Clauses in contracts
There are a number of key clauses that should be included in an employment contract. However, it should be noted that this discussion is not exhaustive and the requirements for different industries may vary.
It is suggested that employment contracts at minimum contain the following key terms:
(a) Parties – although it may appear to be obvious, it is critical to identify the correct parties to the contract. For example, if an employee is technically an employee of a subsidiary versus the parent company, this information needs to be correctly reflected in the employment contract. The parent may not want to unwittingly take on an obligation to the employee, although much will depend on how the relationship of the employee plays out with the parent company and the degree of the relationship between the parent and subsidiary companies in practice as there is, at common law, the doctrine of common employer that allows the court to treat different entities as one employer for the purpose of attributing to liability for damages flowing from such actions as wrongful dismissal[2].
(b) Term– the duration of the relationship between the parties should be worded to reflect the agreement between the parties. We caution employers from using a specific end date unless both parties are clear that the employee will be engaged for a fixed term. If the parties agree on a fixed term and an employee ends up working for the employer beyond the end date of such term the courts will determine that the employee was intended to be a permanent employee. In the event that the courts make this type of determination, the limits on the employer’s obligations contained in the employment contact may be nullified. For example, in terms of termination notice, the employer in such case may be held responsible to provide the employee reasonable notice of termination or pay in lieu of such notice.
(c) Hours and location– the employment contract should specify whether the employer is expecting the employee to devote full working time and attention to the business affairs of the employer. For greater clarity, the employer may want to specify in the contract the number of hours an employee shall be required to work each week and the location of work. In some industries and in some positions, the hours of work the employee will be required to work may be irregular or vary. The contract should specify this so that there is no misunderstanding on the part of the employee
(d) Title and Job Description – the employment contract should include the employee’s title and a description of an employee’s duties; however, this description should include some flexibility in the language to allow for additional duties to be assigned and to avoid the possibility of a constructive dismissal claim.[3]
(e) Compensation and Benefits – the employment contract should specify the employee’s remuneration. More particularly, the contract should delineate the employee’s gross annual salary and how it will be paid-for example, in equal bi-monthly or semi-monthly instalments. If there is any bonus plan and the terms of that plan, whether there are any milestones that need to be achieved to earn the bonus and if the employee must be employed at the time the bonus is payable and such other requirements for earning a bonus.
(f) The contract should also specify any benefit plans such as health and welfare benefits the employer may be providing directly or arranging through a third-party or outside provider. The contract should specify if there is any obligation on the employee’s part to pay any premiums for any benefit plans and if there is any eligibility requirements such as a waiting period before the employee is eligible for the benefits. If any benefits are provided by an outside third-party then the employer may want to make sure to state in the contract that the employee’s rights under these benefit plans shall be determined entirely by the terms and conditions of the plans and the employee shall have no independent rights as against the employer in connection with the said benefits. This may prevent the employee who is denied coverage or had their claim for benefits denied by the third-party provider to pursue the employer for their losses.
(g) Probation period – if the employer has no previous experience with the employee and wants to make sure that the employee is suitable for the position, the employer may want to include in the employment contract a probation term. Probation term is essentially a trial period during which the employer will assess and evaluate the employee to determine if she is suitable for long-term employment with the organization.
(h) Vacation – the amount of vacation time that an employee shall receive should be included in their employment contact.
(i) Expenses – if an employee should receive reimbursement for their expenses, the contract should set out what sorts of expenses are reimbursable and the process the employee is required to follow (submit receipts within a set period) to obtain reimbursement.
(j) Manuals or Policies – if the employer has a policy or procedures manual that they wish the employee to follow, the manual should be incorporated by reference into the employment contract. The employer should provide such manual to the employee as soon as they are hired. The employer should also provide the employee with any updates to the manual within a reasonable period of time.
(k) Confidentiality – if the employee has access to confidential information in connection with the employer’s business, the employment contract should contain express terms regarding how the employee will treat such information so that the employer’s confidential information is not at a risk of being misused or getting in the wrong hands or disclosed to competitors.
(l) Post employment restrictive covenants – if an employer is concerned that the employee may leave the employer and compete with the employer or solicit business in competition with the employer from the employer’s customers, the employer may consider including in the employment contract properly drafted post employment restrictive covenants. Two common types of restrictive covenants in employment agreements are non-competition and non-solicitation covenants. A non-competition covenant is intended to prohibit a departing employee from competing with her former employer and a non-solicitation covenant prohibits the departing employee from actively soliciting her former employer’s clients. The latter is narrower in scope and more likely to be upheld. Having said this, it is important to note that if any restrictive covenant goes beyond what is reasonably required to protect the employer’s proprietary interests-client relationships, confidential pricing information, client lists, and such-the courts will not enforce the clause. It is important that the employer discuss with their legal counsel what proprietary interest they need to protect so that counsel may best advise on the type of post employment restrictive covenant to include in the contract.
(m) Termination – it imperative that an employment contract sets out the termination provision for an employee and particularly the amount of notice that an employee is entitled to receive if they are terminated without cause. Under no circumstances should the termination clause violate the notice provisions of the provincial Employment Standards Act, otherwise such a clause will be unenforceable and the employer may be exposed to a greater notice or severance requirement at common law-reasonable notice. It is also important to note that if the employer wants to curtail its notice obligations to the minimum provided in the provincial Employment Standards Act, the employment contract should contain clear language expressing that intent otherwise the employer will be at risk to provide reasonable notice to the employee where the employer is dismissing the employee without cause.
If the employer wants to avoid disruption to its business when the employee decides to quit, the employer may want to include in the employment contract a notice requirement or obligation on the employee. For instance, if the contract provides that the employee must give 30 days notice of termination of her employment, the employer may have sufficient time to hire her replacement and not suffer any disruption in its business as a result of the departing employee.
(n) Termination – it imperative that an employment contract sets out the termination provision for an employee and particularly the amount of notice that an employee is entitled to receive if they are terminated without cause. Under no circumstances should the termination clause violate the notice provisions of the provincial Employment Standards Act, otherwise such a clause will be unenforceable and the employer may be exposed to a greater notice or severance requirement at common law-reasonable notice. It is also important to note that if the employer wants to curtail its notice obligations to the minimum provided in the provincial Employment Standards Act, the employment contract should contain clear language expressing that intent otherwise the employer will be at risk to provide reasonable notice to the employee where the employer is dismissing the employee without cause.
If the employer wants to avoid disruption to its business when the employee decides to quit, the employer may want to include in the employment contract a notice requirement or obligation on the employee. For instance, if the contract provides that the employee must give 30 days notice of termination of her employment, the employer may have sufficient time to hire her replacement and not suffer any disruption in its business as a result of the departing employee.
(o) Entire agreement – employers should consider including a statement that the employment contract constitutes the entire of the agreement between the parties. The purpose for including this clause is to ensure that there are no outside discussions imported into the employment relationship.
Drafting Errors
The use of plain language in drafting any type of commercial contract is recommended, and it is especially important in the context of employment contracts where there is, in many cases, a significant imbalance in the sophistication levels between the parties with the employers having the upper hand. Having said this, it is critical that both parties understand the terms of the employment contract. There is often confusion and errors made by employers in connection the use of ambiguous language. Drafting errors can lead to significant consequences for employers because the courts will often favour the position of the employee versus the employer due to the power dynamic between the parties. Therefore, both employment lawyers and employers need to mindful of what they are trying to convey in their employment contracts.
Recommendations / Conclusion
Beyond having a binding a legal agreement in place between the parties, an employment contract carefully drafted by an employment lawyer should provide both parties with a point of reference that clearly set out each party’s obligations for the term of the contract. In the event that the parties have not entered into a written employment contract, the Canadian courts acknowledge that they will often look to the intent of the parties to import the rights and obligations that they view as appropriate in the context of an employment relationship. [4] As a result, in the absence of an employment contract, an employer may potentially end up having more obligations to an employee than either party intended. Therefore, it is advisable that employers take the time and expend the necessary resources prior to an employee joining their team and thus reduce or curtail the possibility of later litigation. The costs of litigation will always outweigh the costs of having an employment contract prepared.
* The author thanks Sarah Sidhu for all her assistance in co-authoring this paper.
[1] Canada Square Corp. v. VS Services Ltd., [1981] O.J. No. 3125, 34 O.R. (2d) 250 at 260 – 61 (Ont. C.A.).
[2] In Sinclair v. Dover Engineering Services Ltd., 1987, CanLII 2692, the BC Supreme Court, in determining who was the employer of the employee in context of a wrongful dismissal action where one company hired him and another, a holding company, paid his salary, stated:
As long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or in equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract. What will constitute a sufficient degree of relationship will depend, in each case, on the details of such relationship, including such factors as individual shareholdings, corporate shareholdings and interlocking directorships. The essence of that relationship will be the element of common control.
[3]Faber v. Royal Trust Co., 145 D.L.R. (4th) 1 [1997] 1 S.C.R. 846
[4][2001] O.J. No. 1574, 8 C.C.E.L. (3d) 204 at 210 (Ont. C.A.), leave to appeal refused [2001] S.C.C.A No. 339 (S.C.C.)
