Canadian Employment Law Today

April 16, 2014 4 published by Canadian hr reporter, a thomson reuters business 2014 making a contract stick Employment contracts are important tools for regulating the employment relationship — if properly drafted | By lAurA WilliAMS | EmploymEnt contRactS can save em- ployers a lot of headaches by clearly governing the variables that make up an employment relationship. However, from a legal practitioner's viewpoint, it's surprising that many or- ganizations — from small to medium- sized companies, to even large corpora- tions — either don't start employment relationships with such agreements or rely on deficient agreements that fail to cover many of the key contract terms necessary to address the contemporary employment law landscape. While some use template contracts so out-of-date as to be almost unenforce- able in a court of law, others omit criti- cal clauses around pressing issues such as termination, confidentiality and own- ership of work product. But even in the case of well-drafted employment agreements, we typically see three common employment contract deficiencies that could cost organizations time, money and unnecessary stress. All of these can be easily avoided with the right legal advice. termination clauses The first is bonus entitlements in termi- nation clauses. Termination clauses are a crucial component of any employment contract because they dictate the notice entitlement — or compensation in lieu — an employee will receive upon termi- nation. But where an employee is entitled to annual bonuses, particularly significant ones in the case of senior executives, the term "compensation in lieu" can be left open to interpretation by the courts where the term is undefined. That in- cludes cases where termination clauses only refer to termination payments be- ing based solely on base salaries and fail to address other types of compensation that are earned. Take the 2013 case of Bernier v. Nygard International Partnership. The employ- ment agreement only stipulated that an employee would be eligible for a non- discretionary bonus provided that he was employed on Nov. 30 of each year. The agreement was silent on entitle- ments to bonus upon termination. The employee was terminated in December 2012 and given her 2012 bonus because she was employed on November 30 of that year. However, the employee argued she was also entitled to her 2013 bonus be- cause her notice period of 13 months would meet the Nov. 30 requirement for the 2013 bonus. The Ontario Supe- rior Court of Justice — and later the Ontario Court of Appeal — agreed with the employee and found liability could have been limited with an agreement that explicitly provided that there would be no bonus payable upon termination, and such an agreement would have been valid and enforceable. Termination clauses that include re- strictions on bonus entitlements should be carefully drafted, as courts will closely scrutinize the clauses to ensure whether they are lawful and enforce- able. This was underscored in the 2012 case of Dimson v. KTI Kanatek Technolo- gies, where a terminated employee chal- lenged the validity of the termination clause, arguing the restrictions on bonus entitlements were illegal, and thus the termination clause was unenforceable. In this case, the term limiting bonus payments upon termination was writ- ten in clear and unambiguous language, was in compliance with employment standards legislation and was consistent with the rest of the agreement. temporary layoffs Another trap for employers involves tem- porary layoffs. Employers in unionized workplaces have collective agreements with clear rules by which they can lay off employees. However, those in non-unionized envi- ronments often proceed on the assump- tion that they have an automatic right to temporarily lay off employees in times of economic or business downturn, and only need to comply with provisions un- der employment standards legislation. In doing so, many make a huge mis- take. That's because employers have the right to temporarily lay off employees if their employment contracts contain clauses allowing them, or where the employer can demonstrate it is under- stood among employees that layoffs are possible within the company based on established practice. Otherwise, the em- ployer faces the risk of being accused of constructive dismissal. Even in the case where clauses per- mitting temporary layoffs are included in an employment contract, employers caSE in point: EmploymEnt contRactS Continued on page 5 BackgRounD oncE thE BuSinESS caSE iS maDE, many employers will buy into the value of a well-drafted employment contract. They understand that these documents govern the relationship between employers and their employees, set the terms of employment — from wages and vacation to severance entitlements — and define basic performance expectations, as well as the consequences if those expectations go unmet. Most importantly, they understand contracts can provide employers with security and certainty as to how an employment relationship will begin and end. In that sense, they are one of the most important tools in an organization's HR law kit. termination clauses that include restrictions on bonus entitlements should be carefully drafted, as courts will closely scrutinize them.

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