Sultan Lawyers on Employment Contracts & Severance Pay, Pt. 1

In part one of our three-part series on employment contracts and severance pay, we’ll be highlighting the top four considerations both employers and employees should think about before they enter into an employment contract.  This is important particularly since the details within an employment contract can have long-term implications on an employee’s rights, including the type of severance package to which they’re entitled upon termination.

The law surrounding employment contracts continues to evolve. This includes how courts interpret the rights of employees both during employment and at the time of termination of their employment. Many employees accordingly have termination clauses that are no longer enforceable at law.

A recent decision of the Ontario Court of Appeal provides clarity in this regard.  The case, Waksdale v. Swegon North America Inc., resulted in a finding that a “without cause” termination provision in an employment contract was not enforceable because of a breach in the drafting of the “with cause” provision. This decision indicates that termination provisions will be assessed wholly and that any potential violation of the Employment Standards Act, 2000 (the “ESA”), could render the entire section on terminations void, and therefore unenforceable. 

Below are 4 important points that we believe employers and employees should know about employment contracts and the employment relationship.

1. Employees have certain rights, even if they’re not specified in the written employment contract.

Some employment contracts are more detailed than others. The more detailed an employment contract is, the more likely it is that it will cover various elements of the employment relationship.

We recommend that employment contracts contain certain key provisions that are relevant to most employment relationships. These will generally include, among other things:

• The job title;
• The anticipated start date and length of employment;
• Anticipated hours of work and overtime rules;
• A breakdown of remuneration;
• Details on bonus entitlements, if applicable;
• Details on vacation entitlements; and
• Terms that address expectations and entitlements surrounding resignations and/or terminations.  

Having said this, an employee should not assume that they do not have rights or entitlements just because their employment contract is silent on a certain topic or issue. This is because the ESA, the common law and implied terms play a role in the employment relationship.

The ESA sets out minimum requirements for employment relationships in Ontario. This legislation establishes rules around the payment of overtime, vacation pay, minimum entitlements at the time of termination and the types of job-protected leaves available to employees. If an entitlement is specified in the ESA, then in most cases, an employee will have a right to that entitlement even if it is not specified in their written employment contract. 

In addition to the ESA, employment relationships are also governed by “common law” legal principles. “Common law” refers to judge-made law. These laws are generally more generous than the ESA. Specifically, where a contract does not limit or specify rights and/or entitlements, the common law principles will be read into the employment relationship.

Lastly, there are implied terms. Implied terms represent terms that are not expressly stated in the contract, but are reasonably expected by both parties. For instance, there is an implied term that an employee will perform their employment duties with due diligence. There is also an implied term that an employer will provide a workplace that is safe and free from discrimination.

All the above-mentioned elements will make out part of the employment contract even if it is not specified in writing. As a result, simply relying on exactly what is written in the contract may be detrimental for an employee or employer.

If an employee has questions about circumstances that are not covered in their written employment contract or in the event that they are fired and require the review at that time, they should reach out to legal counsel to have their options and rights reviewed and assessed.

2. Employees still have entitlements and protections when a written employment contract does not exist.

Some employees are concerned when they begin a new job and are not provided with a written employment contract. Parties to an employment relationship should be aware that they do in fact have an employment contract even if it is not in writing.

It is generally in an employer’s best interest to provide a written employment contract. This is because a written contract is the employer’s opportunity to define limits and entitlements for an employee throughout the term of their employment, subject to statutory and other requirements.

In the absence of a written contract, employers may be subjected to a judge’s interpretation of the terms of the employment relationship. Generally, this interpretation will come through testimony and/or the application of common law principles.

In most cases, these conditions and terms are more favourable for an employee.

3. Employment contracts signed after an employee has started working may not be enforceable.

In most cases, employees are asked to execute the employment contract on the date they commence work or shortly thereafter. In other situations, an employer may present a written employment contract months or even years after the employee has commenced employment.

When a written formal contract is created after employment has already commenced, the terms within the contract may be considered unenforceable. Instead, the terms agreed to prior to the commencement of active employment will prevail in court. 

The reason for such a finding has to do with the concept of “consideration”. All parties to a contract must receive something of value in exchange for their commitment in order for the contract to be enforceable. Generally, where an employment contract is involved, the consideration provided by the employer is employment after the execution of the employment contract and the consideration provided by the employee is the execution of a contract with various terms and conditions. When employment has already started, the employee’s consideration is no longer there, and fresh consideration may be required to enforce a contract signed at that point.

When an employment contract is considered unenforceable, there may be additional financial liabilities for the employer, commonly in the form of a larger severance package. Terms such as a non-compete or non-solicitation clause may also be impacted if they are covered in an employment contract that has been entered into after the commencement of employment.

If an employer attempts to enforce or rely on a contract that was entered into after the employee had already started, then the employee should seek advice from legal counsel before signing.

In addition, an employer should consider consulting with legal counsel for guidance if they would like to introduce a new employment contract for an existing employee.

4. Failing to have an employment contract reviewed prior to its execution or at the time of dismissal may result in significant losses for an employee.

Having an employment contract reviewed by an employment lawyer prior to signing can be helpful for several reasons, including the following:

• It can help the employee understand their entitlements and any limitations;
• It can ensure that any verbal commitments or other representations are featured in the written contract or documented elsewhere;
• It can help the employee understand the consequences of different terms in the employment contract; and
• It can help the employee negotiate more favourable terms in their contract.

Having an employment contract reviewed at the time of dismissal can also be beneficial.

As employment lawyers, we often grapple with determining the appropriate severance package for an employee following a wrongful dismissal or constructive dismissal. This is because the section of the employment contract that addresses separation of employment can restrict an employee to the ESA minimums, or provide for a greater amount.

Occasionally, employers will rely on poorly drafted or unenforceable employment contracts to limit an employee’s severance entitlements at the time of a wrongful dismissal. Having a contract reviewed prior to signing off on a severance package could be the difference between collecting a few weeks of termination and severance pay or several months of severance pay. 

If you are an employee who has received a new employment contract, or if you are an employer that would like assistance with the drafting or review of an employment contract, contact Toronto severance lawyers, Sultan Lawyers at 416-214-5111 or here.

You can see part two in the series here.