The Benefits of Written Employment Contracts (A Horror Story for Employers That Can be Avoided)

Posted on 6 December 2019 Back to News

Andrew Mae

By: Andrew Mae

Partner, HGR Graham Partners LLP

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Many employers hire employees without using any form of written employment contract. It appears that the mindest is, as there is no legal requirement to have one, why waste money on having a lawyer draft one?

Employers often retain me after they have terminated an employee and received a demand letter seeking payment of common law entitlements.

In many instances, employers tell me that they have never heard of common law rights. Invariably, they also say that over the years have terminated many employees and have never had a claim. They are also usually very unhappy with how much severance employees are entitled to under the common law.

In other instances, I encounter situations in which the employer has cobbled together a contract obtained either from the internet or some other source that provides the employer with no recourse. Inevitably, self-prepared contracts do not provide the employer with the protection it had hoped to achieve, making the contract not worth the paper it was written on.

A well-drafted employment contract that does not offend the Employment Standards Act (“ESA”), can limit an employee’s entitlement upon termination of employment to the minimum ESA entitlements. The ESA entitlements are significantly less than those under the common law.

The notice period required under the ESA is one week for each year worked to a maximum of 8 weeks. During the notice period, which may be provided either by way of working notice or pay instead of notice, employees are also entitled to vacation pay and benefits.

Additionally, for employers whose annual payroll exceeds $2.5 million, the ESA provides for severance payments to employees whose service exceeds five years.  ESA severance is one week for each year of service to a maximum payment of 26 weeks.

Under the common law, which is “judge-made” law, an employee’s entitlement to severance/notice is decided on a non-exhaustive list of considerations. Those considerations include:  the type of employment, length of service, the employee’s age and the availability of alternative employment. Each case is decided on its own merits. 

Many people speak of a ‘rule of thumb’ of one month’s pay/benefits/bonuses per year of service for calculating common law notice/severance. However,  in reality, there is no ‘rule of thumb’.  A review of decided cases, which at face value appear to be based on comparative employees,  shows results which are startling diverse. Generally, subject to exceptional circumstances, the cap on common law severance/notice is 24 months.

While an award of common law severance/notice will include the amounts provided under the ESA, it will always be more than the ESA requirements. Therefore, it can be costly.

There often are situations in which providing working notice is not practical, such as when the employer knows that the employee will be disruptive or unproductive during the notice period.  Equally, when the decision to terminate is based on the employee’s performance or behaviour but is not so severe that it would warrant a termination based on cause.

Through social and other media, employees have become more aware of their rights and entitlements. Also, many lawyers offer contingency fee (“no win no fee”) services for representing terminated employees, which probably goes some way to explaining why, in the past, employers that have terminated employees without recourse. Employees have the same access to information and legal support as the employers resulting in them asserting their rights.

A terminated employee has two years to file a lawsuit against an employer for wrongful termination (i.e. to claim their severance/notice). There are circumstances in which that two year period combined with unfortunate circumstances may see the employee’s entitlement, and in turn, the employer’s obligations, increase exponentially. This is a severe risk for employers who, as part of the employee’s compensation, provide benefit coverage which includes long-term disability (“LTD”) and life coverage.

Due to statute, insurance benefit providers are obliged to continue all benefit coverage for terminated employees for the notice period provided under the ESA only. However, after the expiry of the ESA notice period, i.e. during the common law notice period, employees are entitled to receive the continuation of benefit coverage. However, the insurers are not obliged to provide LTD or life coverage. Therefore, many (or most) insurers do not. The consequence being that, if the former employee becomes disabled during the common law notice period, the employer may effectively become the employee’s LTD provider until s/he is fit for work or until the age of 65, (or the LTD coverage period), or cover the life insurance payment  if s/he were to pass away.

Employment contracts should be part of the process of offering employment to a prospective employee. In other words, the contract should be the offer of employment and, once accepted,  becomes the agreement between the parties. It is not something that should be presented to the employee on his/her first day or work or after s/he has started work. There are ways and means of amending the terms of existing employees which are beyond the scope of this article.

A well-drafted employment contract:

  1. Can limit the employee’s entitlements to the ESA;
  2. Provides certainty to both parties at the outset of the relationship about what will be provided when the employment is terminated;
  3. Removes the risk, expense, time and stress of dealing with arguing or litigating over the employee’s entitlement;
  4. Removes the uncertainty that is part of the common law.

There is also the obvious benefit that the contract sets out clearly what the parties have agreed in respect of the employee’s obligations and entitlement both during and after employment.

So, is having a lawyer draft an employment contract a waste of money?

Andrew Mae is the head of the Corporate & Civil Litigation Group at HGR Graham Partners. Andrew  has a focus on Employment Law, human rights claims, land-related disputes, commercial contract and professional negligence claims, corporate, commercial and business disputes including shareholders’ disputes.

*The content of this article is intended for general information purposes only and does not constitute legal advice or an opinion of any kind.  For information or legal advice on your individual circumstances, please contact Andrew Mae.

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