Simple way to slash legal costs often ignored

Despite a potential for significant savings in legal fees, many employers don’t use employment agreements

Stuart Rudner
Employment lawyers often use the analogy that employment agreements are like pre-nuptial agreements. They are usually entered into, or at least contemplated, at the start of a relationship. The people involved are typically excited and optimistic about their future together. The end of the relationship is not even on their radar screens — people don’t even want to think about it. But they should. If the relationship does come to an end, for whatever reason, the agreement can provide guidance regarding each party’s right and obligations, saving them money and aggravation.

It seems the vast majority of employers in Canada don’t bother to have employees sign an employment agreement. This includes large, multinational corporations. This means the vast majority of employment relationships are based upon verbal agreements, with additional terms implied by law. One of those implied terms, the right to reasonable notice in the event of termination without cause, can cost employers and employees thousands of dollars in legal fees and cause human resources managers untold headaches. That is because the “reasonable notice” requirement is uncertain and open to argument in any given scenario. Having an employment agreement that specifies the notice period can eliminate that uncertainty and greatly reduce legal costs.

Every employee has a contract of employment. But the vast majority of these contracts are verbal. Typically the employee will be interviewed and then, either during the interview or soon thereafter, offered the opportunity to work in a certain position for a certain salary. There may be some discussion as to the amount of vacation or other benefits. He accepts the offer, shows up for work on the designated day, and the employment relationship commences. But the law implies a number of other terms into the contract. For example the Employment Standards Act or equivalent will establish terms regarding items such as hours of work, overtime, statutory holidays, maternity leave, and notice of termination. The common law will also imply terms, particularly regarding notice of termination.

The parties are free to enter into a written contract which sets out as many, or as few, terms as they like. To the extent that certain issues are not covered in the written contract, the law will imply them as if there were no written agreement. A contract could specify the position, salary, vacation, and hours of work. Other terms, such as notice of termination, would continue to be implied by both the applicable statute and common law.

There are very real benefits in having a written employment agreement in place, particularly when it comes to the dismissal of an employee. Unless just cause exists the employee will be entitled to notice or pay in lieu. The question, however, is how much notice? The Employment Standards Act is only a starting point. Companies that only pay the amounts set out in the act do so at their own peril. The common law requires that “reasonable notice” be provided. As many employers are aware, there is no black and white guideline or chart to follow in order to understand what that requires. The courts have said that each case must be decided based upon its own facts, including factors like the age of the employee, length of service, type of position and prospects for finding new employment. As a result employment lawyers can only estimate a range of what a court might find in any given case.

Because there is no certainty regarding the amount of notice to be paid the employer must (or at least should) seek legal advice in order to determine how much notice to offer. The employee, upon receiving the offer, may seek legal advice of his own to determine if the company’s offer is fair. The lack of a definitive answer often means the lawyers involved may disagree on what is reasonable notice in the circumstances. One might say three to five months, the other four to six. Unless the parties can reach an agreement, they both end up paying legal fees in order to have their lawyers negotiate and litigate.

The alternative, of course, is to have a written agreement that explicitly states the amount of notice to which the employee will be entitled in the event of termination without cause. As long as the contract is legally binding, and does not provide the employee with less notice than the minimums set out in the legislation, then the parties will know with certainty what the notice requirement will be if the employer chooses to terminate the relationship. The amount of notice can be a fixed amount, such as one year, or it can be proportionate to the length of service, such as one month of notice for every year of service. Whatever it is the parties can look to the contract for a definite answer and save themselves time, aggravation and money.

As set out above the contract cannot provide for less than the minimums in the applicable act. This is important and can be tricky due to the fact the entitlements under the act change as the employee continues to work. If the contract provides for one month of notice of termination, that would be fine for the first few years. But once employees have completed five years of employment, they will be entitled to five weeks’ notice under the act. At that point the contractual term would violate the act and would be unenforceable — the parties would be governed by the common law and left with the same uncertainty as if they had never entered into an agreement. Some judges have held that a clause will be void simply because it has the potential to violate the applicable statute. For this reason it is best to either establish a fixed amount of notice that is beyond what an employee could ever be entitled to under the applicable act or to provide for notice that increases with seniority.

Sometimes the employer believes it has an enforceable contract. But courts are reluctant to enforce contracts where an employee is giving up rights he might otherwise have. For that reason the contract must not only be written in a manner that is enforceable, but also signed under appropriate circumstances. Many employers fail in this respect.

For information on how to create an enforceable contract of employment, click on the related article link below.

Stuart Rudner practices civil litigation and employment law with Miller Thomson LLP’s Toronto office. He can be reached at (416) 595-8672 or via email at [email protected].

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