Introduction

Unlike the situation in the United States, employment in Canada is not "at will". Therefore, in the absence of an express agreement to the contrary, there is an obligation to provide an employee with reasonable notice of the termination of his or her employment.

Employees who do not receive reasonable notice of termination of their employment are entitled to seek damages. These damages are commonly referred to as "pay in lieu of notice" of termination.

Reasonable Notice:

The period of reasonable notice is typically calculated in two circumstances:

1. An employer wishes to terminate an employee and wants to provide him or her with the appropriate notice at law, or
2. The employer has not provided reasonable notice of termination and a Court must determine the employee's damages, which will be equivalent to the months of notice to which the employee was entitled.

The determination of what period of notice is "reasonable" will vary with the circumstances of each case.

All Canadian jurisdictions provide for a period of notice specified by statute. However, in addition to notice prescribed by statute, the Courts have created common law reasonable notice of termination. In determining what length of notice of termination is reasonable at common-law, Canadian courts have considered the employee's age, position within the company, length of service and the availability of alternative employment. It is not uncommon, for example, to see a court determine that a middle manager in his or her late 40s with ten to twelve years of service should be entitled to a twelve month notice period. Notice periods as high as 24 to 30 months have been set by some Canadian courts, in special circumstances. Employers who keep these factors in mind are more likely to provide employees with adequate notice of termination and are more likely to avoid wrongful dismissal litigation.

Certainty in the period of notice to be provided can be achieved by an express agreement between the parties. Employment agreements that fix the term of notice to be provided upon termination are lawful so long as they meet or exceed the minimum statutory requirements for notice set out in the employment standards legislation.

Employers should avoid setting down a fixed period of notice that could be reasonable in the short-term, but that could become unreasonable over time. For example, four months notice of termination could be reasonable when an employee is 30 years old and just starting a job, but unreasonable twenty-five years later when the employee is 55 years old and has been employed by the employer for twenty five years.

In all cases, the employment agreement should specify that if the contractually agreed upon period of notice should become less than the statutory minimum (usually as a result of changes in legislated requirements), the new legislated minimums will prevail.

An employer should always allow an employee to obtain independent legal advice before requiring the employee to sign an employment contract. This general statement particularly applies when the employment contract limits the period of notice to which the employee may be entitled. This is the case even where the contract exceeds the statutory minimum notice provisions in the applicable legislation. If an employee is prevented from seeking independent legal advice, a court may find that the provision in the employment contract is unconscionable and therefore unenforceable. A court will base a finding that an employment agreement is unconscionable on the fact that the provision was imposed unilaterally by the employer for the employer's benefit.

Content and Form of Agreement:

There is no specific requirement for the form in which a written employment agreement must be drafted. In fact, even where there is no written employment agreement, a court will find that an oral contract of employment exists, and will attempt to determine the terms and conditions of employment agreed to between the parties. However, writing the employment agreement will provide the most certainty for the parties. The required "writing" may be very minimal; an offer letter, for example, may contain the essential terms of the parties' agreement and therefore be found to be the employment agreement.

It is important that all the essential terms and conditions of employment be established before employment commences. An employer may be prevented from changing the terms and conditions of employment, or from adding new terms and conditions, after the employment agreement is signed. Any terms to be established subsequent to the commencement of employment must be accompanied by fresh consideration or reasonable notice to be valid.

If specific policies and/or procedures are to be incorporated into the contract (such as severance policies, conflict of interest guidelines, confidentiality requirements, drug testing policies, transfer/moving policies, etc.) they should be specifically referred to in the employment agreement and a copy provided to the employee prior to executing the document.

If the contract is to be of a fixed duration, the duration must be specified. This is discussed in greater detail, below.

Job Duties:

Any unilateral change to an employee's terms and conditions of employment, of a fundamental nature, must be made upon adequate notice to the employee. A failure to give an employee adequate notice of a fundamental change is a constructive dismissal, which entitles the party that is not in breach to elect whether to accept the change and continue to work or to reject the change and sue for wrongful dismissal.

The most common change upon which constructive dismissal claims are based is a revision to the employee's duties and responsibilities. Therefore, employers should be cautious when specifying the duties of an employee's position in an employment agreement. If duties are to be specified, the agreement should be drafted to allow the employer the flexibility to change the employee's duties and responsibilities without constituting a constructive dismissal. For example, the employment agreement should describe the employee's duties and then specify the employer's right to assign "such other duties generally consistent with the terms specified herein".

Duration of the Employment Agreement:

At a minimum, the employment agreement should set out the start date of employment. If the employer wishes to establish a fixed term employment contract, the end date of the contract must also be specified in the agreement.

Note that a fixed term employment contract is a very specific type of employment contract in which the parties determine before the start of the relationship, when that relationship will end. The contract must be crystal clear as to the duration of the term of employment. When the parties establish a fixed term contract, the employer will not be required to give the employee notice of the end of the contract, or pay in lieu of providing that notice. The general obligation to provide notice of the end of the employment relationship is removed because the parties have specifically contracted for the end of the relationship at its outset.

If an employer enters into a series of fixed term contracts with an employee, courts will generally determine that the effect of the fixed term is nullified, and the employee is considered to be entitled to reasonable notice of his or her termination.

Position:

The employment agreement should set out the employee's position and/or job title together with the general duties of the position. As noted above, the employer should retain some flexibility to change those general duties as the need arises.

Salary and Benefits:

The employment agreement should state the employee's salary in the terms upon which it is being paid. For example, if an employee is paid hourly, his or her hourly rate should be set out. If an employee is paid annually, his or her annual salary should be specified. If there is any difference between the employee's starting salary and his or her salary following the completion of a probationary period, this should also be specified.

Any benefits that an employee will be eligible for during the course of employment, and any limitations on those benefits, should also be specified (for example: car allowances which are payable if the vehicle is used during the course of employment, phone allowances for work related phone calls, or medical or dental benefits).

If health and dental benefits are provided pursuant to contracts of insurance with third parties, the employment agreement should specify that it is the third party that is providing the benefit. The employment agreement, as well as any benefit brochures issued, should make it clear that eligibility and entitlement to benefits provided by third parties are subject to the terms of the contract with the third party, and should further stipulate that the employer does not itself provide benefits.

Probationary Period:

Any probationary period should be set out, along with any review process which determines whether the employee will continue on after the completion of the probationary period. If the employer wishes to retain the option to extend the probationary period where considered necessary, this should also be specified.

The right of the employer to terminate employment during a probationary period will not be implied by the Courts; if the employer wishes to retain this right, it must be contracted for between the parties. Notably, where employment related legislation provides for employment benefits after a period worked with the employer, these benefits may not be contracted away by extending the probationary period.

>Vacation:

The employment agreement should specify the amount of vacation time to which an employee is entitled. Whether the vacation period is to be paid at full salary, or based on statutory rights, should also be specified. Note that the Ontario Employment Standards Act requires the employer to provide employees with two weeks of unpaid vacation per year, after the employee has been employed for twelve months. In addition, employees are entitled to receive 4% vacation pay per year. An employee begins to earn vacation pay as soon as they become employed.

Whether vacation time can be accrued and carried into following years, or must be used during the calendar year, should also be specified. In any event, in Ontario, an employee must use their statutorily provided vacation time within ten months of the year in which it is due.

Cause for Termination:

Employers may avoid providing notice of termination of employment, or pay in lieu of notice, where there is cause for the termination of employment.

Employment agreements should always set out that the employer may terminate an employee's employment at any time, without notice or pay in lieu of notice, where the employer has cause for termination. If the employer sets out examples of the type of conduct that will constitute cause for termination without notice, care should be taken to state that the list is not intended to limit the circumstances that might constitute cause.

Cause for termination exists where the employee's actions are so fundamentally inconsistent with the continuation of the employment relationship that the employer is entitled to determine that the employment relationship cannot continue. Egregious conduct will be required to support a finding that there is cause to terminate the employment relationship without notice or pay in lieu of notice thereof.

The types of conduct that have been found to constitute cause for the termination of the employment relationship include:

• Theft.
• Dishonesty, where honesty is central to the employment.
• Violent or harassing behaviour.
• Conflict of interest.

The Supreme Court of Canada decision McKinley v. B.C. Tel, [2001] 2 SCR 161 stands for the proposition that dishonesty may not always be grounds for the immediate termination of an employment relationship. This decision is therefore very important for the employer that must decide whether or not to terminate the employment of a dishonest employee.

The decision requires employers to consider the different degrees of dishonesty that may be engaged, and to decide whether or not the particular employment relationship is irreparably damaged as a result of the type of dishonesty that has occurred. The Supreme Court was clear that an employee who lies to his or her employer may only be dismissed for cause where the dishonesty is fundamentally inconsistent with the employee's employment obligations so as to give rise to a breakdown in the employment relationship. As a result, each case will turn upon its own specific facts.

Where the conduct is not so egregious as to constitute a complete breakdown of the employment relationship, but has been repetitive, the employer may be able to establish cause for termination on the basis of the continuing conduct. In this case, the employer will have to establish that warnings have been given to the employee and that the employee was aware that his or her employment would be terminated if the conduct was not corrected.

Please also note that, in Ontario, even if an employer has “just cause” to terminate the employment of an employee, it may not relieve that employer of the obligation to pay that employee their minimum statutory entitlement to notice of termination or pay in lieu thereof (as opposed to their common law or contractual notice). Rather than simply adopting the “just cause” standard for terminations, the Employment Standards Act states that an employee must be guilty of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”, in order to be disentitled to notice of termination (or pay in lieu thereof). This imports a requirement that the employee have intended his actions or known (or should have known) the consequences thereof.

Conclusion:

Employment agreements may be either written or oral. Written employment agreements, however, will create more certainty in the relationship between the employer and the employee if properly drafted.

Obviously, for most employers, the most important provisions in the employment agreement will be those that deal with the end of the employment relationship, as damages flowing from an improper termination of employment are a potentially severe liability.

Other issues which may be addressed in the employment agreement relate to:

• Time off during statutorily provided holidays, with or without payment.
• Time off for non-statutorily provided holidays, with or without payment.
• Overtime hours which may be worked, and the payment to be received for overtime worked.
• Payment for business expenses and any limits on the types of business expenses which may be incurred.
• Confidentiality clauses, both during and post employment.
• Non-Competition clauses to prevent competition with the employer during and following employment.
• Non-solicitation clauses to prevent the recruitment of former colleagues and clients during and following employment.
• The governing law where the employer carries on business in more than one jurisdiction.

In all cases, the employment standards legislation of the jurisdiction in which the employee is working will be critical. If the employment agreement or certain provisions thereof violate employment standards legislation, they may be voided. As a result, employers should consult experienced employment counsel in the jurisdiction in which the work is taking place prior to entering into any employment agreement.