Friday, September 16, 2011

Back to Basics: Why should we use an employment contract?

Most sophisticated employers use (or should use) written contracts for their employees.  The advantages are myriad, in terms of setting out expectations for how the employment relationship should move forward, including remuneration, yet the most significant advantages arise upon termination of the employment relationship.

Termination by the Employee

This is a minor point, but not unimportant.  Many employees wrongly think that 2 weeks notice of resignation is just a courtesy.  Only in certain narrow circumstances is it statutorily required in Ontario, but under common law an employee must give "reasonable notice" of resignation.  That's contextually based, and not the subject of much case law, but it's safe to say that 2 weeks isn't always the magic number.  (If you have a great deal of responsibility, and you expect the employer to need time to assign your duties elsewhere, you might consider giving more notice.)

So the advantages of having a clause addressing this in the contract are two-fold:  Firstly, it tells the employee in no uncertain terms that they are, in fact, required to give notice, rebutting the myth that they can leave at will if they want to.  Secondly, it determines how much notice is required.  If the employer thinks that 4 weeks is necessary to make the transition, 4 weeks notice can be required.  Or longer, in the right case.  Employees seldom feel very empowered to negotiate the terms of an employment contract, and even less so as regards termination clauses.  (See this earlier entry regarding negotiating termination clauses.)

That being said, insisting on too much notice may send the wrong message to the employee.  I have seen contracts requiring employees to give three months of notice, but in one of those contexts (being a contract that was being put to me personally by a prospective employer) it was coupled with other red flags that told me that the firm was having difficulties with employee retention, which factored significantly into me not accepting the offer.

Termination by the Employer

This is, by a large margin, the most common issue to arise from employment contracts.  As I discussed in detail in this recent entry, when terminating an employment relationship without just cause, an employer is likewise obligated to give notice or pay in lieu thereof.  There's the statutory minimum, which creates a floor for most employees, yet the implied term requiring an employer to give "reasonable notice" usually makes for much more significant liabilities.

So, once again, there are two advantages to the termination clause:  It can be used to reduce liabilities to as low as the statutory minimum, and it also provides some degree of certainty.  Calculating "reasonable notice" is not an exact science, and an employer shouldn't be surprised if the employee's lawyer is demanding a significantly higher amount of money than the employer's own lawyer opines they should need to pay.  Just negotiating a settlement is going to drive up legal fees, and it gets even more expensive if it has to go to litigation.

As well, there are related advantages in terms of limiting the employer's responsibilities.  When setting out the terms of the remuneration package in the written contract, Courts have held in some circumstances that terms requiring 'active employment' as of certain dates for bonus eligibility can be enforceable.

Post-Employment Obligations

A written contract at the outset of employment is really the best time to set out any restrictive covenants.  If you're going to require non-solicitation or non-competition clauses, that's the place for them.  Of course, there are certain requirements for restrictive covenants to be enforceable (which I previously discussed here).

Tomorrow, how to make a written employment contract binding.


This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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