[BY WARDS PC LAWYERS]
Employers and employees should enter written employment agreements.
They define the employment relationship, the role of the employee, compensation (salary, benefits, bonus, pension, etc.), expectations and ideally how the relationship would end, if necessary.
Written employment agreements should specifically address how each party may end the relationship in future, if necessary and, if so, what compensation will be payable to the employee on termination, if there is no “cause” for the termination.
In Ontario, the Employment Standards Act, 2000 (the “Act”) provides for the basic rights of employees on termination, such as termination pay and severance pay, if payable. It is important to know that these are the basic, statutory entitlements, which must be paid by employers in Ontario (with a few, limited exceptions). However, employees are generally entitled to reasonable notice or pay in lieu of notice beyond the basic requirements of the Act. An employee’s entitlement to this additional compensation is determined by cases in Ontario (i.e., by the Courts and judicial system, or the “common law”), often in the context of wrongful termination claims by employees.
Ontario law provides that employers may terminate any employee without paying termination damages (unless there is a fixed period of employment), even in the absence of “cause”, if the employer provides reasonable notice of the termination or pay in lieu of that notice. This “common law” reasonable notice obligation, which is generally greater than the minimum requirements of the Act, can be reduced or limited by the employer by a properly-worded employment agreement that is negotiated and entered by the parties at the beginning of the relationship. Therefore, often very costly termination litigation is avoided when both parties mutually agree at the outset how the termination will be governed, which offers certainty and clarity to both.
In Ontario, if an employer wishes to reduce or limit the “common law” reasonable notice to which an employee may be entitled on termination, here are few tips to consider:
1. employment agreements purporting to limit common law notice must be entered before the employment begins, not after, unless there is “fresh consideration” given to the employee, which cannot be continuing employment. Often employers offer more compensation or a promise of promotion, for example – in any event, an employee must receive a new benefit if the employer wishes to enter an employment agreement with the employee after the employment relationship has begun;
2. you cannot ‘contract out’ of the minimum requirements of the Act – you can only modify the common law notice requirements. For example, during a period of notice, an employee is entitled to continue to receive his or her benefits coverage, if any, for at least the minimum statutory notice period. If the termination clause is ambiguous, or does not clearly provide for benefits during at least the minimum statutory notice period under the Act, the entire termination clause may be of no effect or protection to the employer. Similarly, if an employer wishes to limit an employee’s right to a bonus on termination, the employment agreement must contain carefully worded language to reflect this, or that clause will not be enforced by the Court. Commonly clauses provide that bonuses will only be payable if the employee is employed at the time the bonus is to be payable. If that takes place during the notice period, generally the employee will be entitled to the bonus payment and, if the employer wishes to limit that entitlement, the employment agreement must be very clear and contain specifically-intended language; and
3. Courts tend to interpret employment agreements strictly against employers, particularly with respect to termination clauses that purport to limit notice to the statutory minimums of the Act. Specific language needs to be incorporated to do so and employers often elect offer more generous terms than the statutory minimums when negotiating notice in employment agreements beyond the minimum requirements of the Act – doing so will generally increase the likelihood that their employment agreement would withstand judicial scrutiny if challenged by the employee.
Employers should always try to use written employment agreements, especially if they do not wish to be exposed to common law notice requirements. If they do, they should also ensure they use carefully-created clauses and they should review their employment agreements periodically, as the law is evolving and what is enforceable today may not be enforceable tomorrow.
Jason Ward – WARDS PC LAWYERS
This WARDSPC BLAWG is for general information only. It is not legal advice, or intended to be. Specific or more information may be necessary before advice could be provided for your circumstances.
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