The Value of Written Employment Contracts: Risk and Reward

Whether you are a start-up or a well-established enterprise, and whether you are hiring your first or your hundredth employee, written employment contracts are a critical tool in protecting your business from unwanted future liability. 

Written contracts not only set out the basic financial and other terms of employment, but they may also include specific provisions governing matters of intellectual property, confidentiality and the restriction of an employee’s right to competitively solicit your clients or customers after departure.

Possibly the single most important purpose of written employment contracts, though, is to lawfully limit the amount of notice or compensation that you will owe to employees whose employment is terminated without cause.

Absent a written agreement with a valid termination clause, employees are entitled to “reasonable” notice or pay instead of notice. Depending on the employee’s age, position, length of service and ability to find a new job, you may have to pay terminated employees anywhere from 3 months to as high as 24 months’ pay on a termination without cause. Contracts with valid termination provisions can dramatically reduce your financial obligation and risk in this regard.

Written contracts that do contain termination clauses will, however, be carefully scrutinized by our courts, where judges routinely make findings that such clauses are unenforceable. Some common reasons supporting a finding of unenforceability include:

1. a lack of “consideration”, where an existing employee has signed a new contract of employment without receiving something of value (a raise or promotion, for example) in exchange;
2. ambiguity in the contract or language that is not sufficiently clear to lawfully limit the employee’s entitlements; or 
3. a violation of employment standards legislation, where the termination provision is capable of providing for less than minimum statutory requirements on termination, whether at present or at some time in the future.

In recent years, Canadian courts have become increasingly prepared to invalidate termination clauses on an expanding variety of new technical grounds. This means that contracts with termination clauses that may have been considered enforceable in past years may require revision to catch up with recent judicial rulings.

There is no better illustration of this “shift” in judicial tolerance for termination clauses than two 2020 decisions of the Ontario courts, decided during the pandemic, finding that even “portions” of a termination clause that are capable of violating the Ontario Employment Standards Act will invalidate other (otherwise valid) portions of the termination clause, or even the whole contract altogether.

It has never been more important that employers protect themselves by taking the following steps:

1. if you are not using written contracts already, start doing so with all new hires, and possibly introduce contracts to existing employees for valid consideration;
2. if you presently have employment contracts in place that are silent on the issue of termination, introduce valid termination provisions for all new hires, and possibly for existing employees where there is adequate consideration; and
3. if you already use contracts with termination clauses, have those clauses reviewed now, and at least annually to keep up with changes in the law and recent judicial rulings.

In all of the above cases, whether you are introducing employment contracts for the first time or are updating existing agreements, your employment contract language should be drafted and/or reviewed by legal counsel well-versed in this specialized area of the law. 

As any business owner who has ever had to let an under-performing employee go knows, establishing “just cause” for terminating someone’s employment is exceptionally difficult in all Canadian provinces.  As such, every business owner should be prepared for the inevitable situation where they will have to provide termination pay in order to let an employee go.  The financial difference between providing termination pay to an employee who has a written employment agreement (with a valid termination clause) to one who does not is often in the many thousands of dollars, even for the most entry level positions.  Making a small financial investment in written employment agreements up front to protect yourself is, both from a legal and business perspective, a no-brainer.

This article was originally published on Business of Cannabis.