November 15, 2009
By Thomas Gorsky
Sherrard Kuzz LLP

Many employers, especially small and new businesses, are content to conduct the hiring process with a handshake and brief letter offering employment. Indeed, many employers in construction-related industries don’t even have that.

Even if a handshake agreement is all you have: you have an employment contract. Your handshake employment contract consists of a mishmash of whatever verbal and written discussions you and the new employee have had, statutory obligations and what courts consider implied rights and obligations.  

By attempting to keep things informal, you may discover that your financial future can be seriously affected, and perhaps even devastated by obligations that you never expressly agreed to, or even discussed. By not having a formal employment contract, you may allow a judge to write your obligations. A judge’s decision is based upon what the law considers reasonable. But when it’s determined what many of these supposedly reasonable obligations are, you could find them overwhelmingly in favour of the employee. That will cost you money.

A ticking time bomb may explode in your face, when some day you want to do something in the best interest of maintaining your business. A letter from a lawyer informs you that you’re breaching an employee’s rights and threatens dire consequences if you do not pay up. The good news is, in most cases, a properly drafted and implemented employment contract, even a simple one, can limit these obligations and secure your business’s financial future.

Obligations on termination

The most common problem arises on termination of employment. An employee terminated without just cause is entitled to reasonable notice of termination, or pay in lieu of notice. While there may be many good reasons to terminate employment, they may be insufficient to establish just cause in law. In order for there to be just cause, the employee must have done something significantly wrong. This is considerably more than simply failing to perform his job in a way that is satisfactory to his employer. Establishing just cause often includes being able to show that the employee engaged in theft or other dishonesty. Even that is sometimes not enough. The bottom line is that often the available evidence will prove insufficient to establish just cause. You must provide reasonable notice, or pay instead of notice.

It is important to appreciate that just cause does not include any consideration of the employer’s circumstances. For instance, if you need to let someone go, or permanently lay them off, because business is bad, that does not mean that you have just cause. The amount of notice owed to an employee, whose employment has been terminated without just cause can be substantial, and you may consider it exorbitant. What a judge considers reasonable notice is primarily based on length of service, the nature of the job, availability of similar positions in the marketplace, and the employee’s age. At the extreme high end, an employee with sufficiently long service may be entitled to a severance award equal to as much as 24 months’ pay.  
A formal employment contract can reduce your reasonable notice obligation substantially. For example, the obligation owed to an employee terminated after eight years of service, might be reduced from approximately seven months pay to eight weeks pay.  

If an employee is performing work in the construction industry, a properly drafted and implemented employment contract (limiting notice and severance to the statutory minimum under the Employment Standards Act) can mean that the employer is not obligated to pay any notice or severance upon termination, but again it’s critical to have that document in place.

A properly drafted and implemented employment contract can address the following crucial issues.

Pre-hiring promises: Problems sometimes arise due to disputes over what an employee claims you promised at the time of hiring.  You probably had discussions as to the potential future of a candidate, if successful in his or her job. You may have even had discussions about a possibility of the employee becoming a partner or owner one day. Without a formal employment contract, you are vulnerable to a disgruntled former employee attempting to twist what you actually said into something different.

Constructive dismissal: Even a temporary layoff or pay cut may result in what is known as a constructive dismissal claim. This is when an employee claims the employer changed a term and condition of employment, and that change is so significant, it’s as if the employer has terminated him. In these circumstances, the employee could successfully sue for the same payment he or she would receive if you’d actually terminated their employment. A formal contract can provide you with protection (subject to compliance with legislative requirements).

Post-employment competition: Another common problem occurs when an employee goes over to the competition, followed by some customers solicited by your former employee after he or she left. You may be vulnerable to a substantial loss of business, as courts consider most employees entitled to leave and go after all your customers. Although you will probably not be able to prevent past employees competing against you, an employment contract can prevent former employees soliciting your customers. This can sharply reduce exposure to financial loss which a former employee can cause.

Mid-employment contracts: You may think that you need to get your current employees to sign formal employment contracts in order to remove these risks. Although this can be accomplished, it is not as simple as obtaining a signature on a new contract. If that happens, and you later try to rely on the contract, a court will likely find it to be unenforceable. An employee who gives up his right to reasonable notice of termination (by signing a new contract that limits those rights), without being offered anything in return, may persuade a court that the contract is void due to lack of consideration. This problem can be overcome if an employee is offered something of value in return for entering into a new employment contract. Consideration can take the form of a raise or a new bonus plan. Again, it is key that the employee signs-off on the new contract before receiving the raise or bonus.

Workplace rules: There are many items which can be inserted into formal employment contracts, but that does not always mean that they should be. Some employers want to introduce into an employment contract detailed rules regarding hours of work, specific safety procedures, payment for overtime and travel time, etc. While these are important issues, it may not be necessary or advisable to introduce them into an employment contract. Employers are entitled to implement rules on how an employee is to carry out his duties. By inserting detailed rules into a contract, an employer may unintentionally limit the flexibility which may be available to the employer to change the rules according to business needs. So, unlike key terms such as notice of termination, or an employee’s compensation, we recommend day-to-day performance issues be included in workplace policies. An employer must ensure that all employees bound by the policies are given notice of those policies, and provided a copy of the policies that bind them as employees.

Employment Standards Act: All employment contracts are subject to compliance with statutory employment standards obligations.  For example, with respect to travel time, while an employer might wish to avoid payment for time spent travelling between jobs, employment standards legislation makes it mandatory that an employee be paid for this time, except for the time spent travelling from home to the first job and from the last job back home.

These are just some of the considerations with formal employment contracts. If you are interested in obtaining the protection which such contracts offer, it is generally necessary to consult an experienced employment lawyer, who will assist in the drafting exercise, as well as the delicate exercise of implementing a contract in mid-employment.  Given what you stand to lose, in our view employment contracts are perhaps the best return on investment you can make in your business.
For information about employment contracts or any other employment or labour-related matter in your workplace, contact any member of the team at Sherrard Kuzz.
Thomas Gorsky is from the law firm Sherrard Kuzz LLP in Toronto, specializing in employment and labour law. Gorsky can be reached at 416-603-6241, or 416-420-0738 (24 hour), or by visiting