Beefing Up New and Pre-Existing Employment Contracts
IT CAN BE DONE IF YOU TAKE THE PROPER STEPS
Q: Given recent economic uncertainty in Canada and the U.S., a number of my clients have been calling me to find out how they can strengthen both their existing and new employment contracts to reduce potential liability in the event of a not-for-just-cause termination or downsizing.
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Ruben R. Goulart,
B.A., LL.B.
Managing Partner,
Keyser Mason Ball LLP
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It is no secret that a well-drafted and well-thought-out employment contract at the start of the employment relationship can prevent frustration and headaches if an employee’s employment is terminated without cause down the road. However, often the existing employment contracts of mid- to long-service employees contain out-of-date contractual language that no longer reflects present-day economic or legal reality. Below, I will explain how employers can unilaterally amend pre-existing employment contracts. I will then give you a couple of suggestions on employment contract clauses that limit termination pay and the provision of benefits to the statutory notice period found in employment standards legislation.
Until very recently, it was an established legal rule that employers could not unilaterally alter or amend fundamental terms of an employee’s contract of employment. To do so would constitute a “constructive dismissal” which would entitle the employee to treat his/her employment as coming to an end and to sue his/her employer for damages. However, in a recent decision, Wronko v. Western Inventory Systems Ltd., the Ontario Court of Appeal explained how employers can unilaterally amend fundamental terms of pre-existing employment contracts and avoid constructive dismissal claims. The Court said that when an employer makes a unilateral change to a fundamental term or condition of employment, the employee can accept this change expressly by signing off on the change or implicitly by acquiescing to the change by conducting him/herself in accordance with the change.
However, if the employee refuses to accept the unilateral change and the employer persists in treating the employment relationship as subject to the new terms, the employee may reject the change and sue the employer for constructive dismissal. Finally, the employee can reject the new term and the employer can advise the employee that this will result in her termination at the end of the reasonable notice period. At the end of the reasonable notice period the employer could offer the employee re-employment on the new and revised terms of employment.
Of course, the other way to amend a pre-existing employment contract is to offer the employee something in exchange for the change – we call that consideration. Usually, the offer of a bonus program or stock option program would represent a great time to introduce or amend contractual terms.
Now that you know how to amend a pre-existing employment contract, I can describe a couple of employment standards based clauses that employers should attempt to include in both existing and new employment contracts. Economic based terminations and downsizings are usually not-for-just-cause, which means the employer must pay the employee notice or pay in lieu of notice.
The notice period is intended to reflect the length of time that it would take the employee to find alternative employment. Notice can either be based on employment standards legislation or it can be based on the common law (the common law is court made law). Employment standards minimum notice requirements are significantly less financially speaking than common law reasonable notice entitlements. Minimum standards entitlements tend to increase directly with an employee’s service and are usually capped at the 8 weeks (unlike common law damages which cap out at 24-months). Therefore, employers should attempt to contractually limit the notice an employee is entitled to, in his/her employment contract to the applicable employment standards entitlements. I recommend that employers insert a clause which expressly limits an employees not-for-cause notice to the notice he/she would be entitled to based on his/her length of service with respect to the applicable employment standards legislation in the particular province or territory. For example a clause could read something like this, “notice or pay in lieu of notice, and severance pay (if applicable) is limited to the minimum the employee would be entitled to under the Ontario Employment Standards Act”.
Another issue that is closely related to notice is the issue of what, if any, benefits an employee is entitled to during his/her notice period. This is an important issue because a lot of litigation is based on whether or not an employee was or was not entitled to short or long-term care benefits during a notice period. To avoid these situations I suggest that in addition to limiting an employee’s recovery to his/her length of service under the applicable employment standards legislation the employer also expressly limit the provision of all benefits to the same notice period. The employer must clearly state that the benefits will cease at the expiration of the notice period. The language would look something like this, “the employee is entitled to his/her normal benefits for the duration of the notice period and benefits will cease at the expiration of the notice period”.
Ruben R. Goulart, B.A., LL.B. is Managing Partner for Keyser Mason Ball LLP in Mississauga, ON and can be reached at 905-276-0404 or via email at goulart@kmblaw.com.
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