It often appears the answer is ‘no,’ but it doesn’t have to be. In fact, an employment agreement remains one of the few tools available to an employer to limit liability in the context of termination.
Absent a properly drafted and implemented employment agreement, a terminated employee may claim entitlement to compensation (including benefit coverage, continued stock vesting, etc.) for a period intended to approximate the time it will take them to secure comparable employment. This period, referred to as the ‘reasonable’ or ‘common law’ notice period, is invariably considerably longer than the minimum termination notice period to which an employee would be entitled under provincial employment standards legislation (the “ESA”).
The delta between the statutory minimum entitlements under the ESA (notice or pay in lieu of notice, severance pay and benefit continuation) and common law notice entitlements for the same employee is often significant, leading to threatened claims, litigation and often substantially increased costs for the terminating employer.
However, as many employers have learned the hard way, considerable care must be taken in both drafting and executing an employment agreement and, even if termination language may have passed muster at one point in time, subsequent court decisions may mean the language needs to be fine-tuned to remain enforceable.
Here are three of the most common missteps employers need to avoid when using an indefinite term employment agreement:[1]
- Attempting to limit termination entitlements to the statutory minimum.
Courts, particularly in Ontario, are exceptionally creative in their approach to interpreting ‘ESA minimum’ termination language, frequently finding the language unenforceable, in which case common law reasonable notice will apply. In that case, the employer will owe considerably more to a departing employee than anticipated.
Does this mean employers should abandon termination provisions altogether? Absolutely not! However, it does mean employers should consider moving away from ‘ESA minimum only’ termination language, as courts are increasingly likely to find this language void.
Significantly, avoiding ‘ESA minimum only’ termination language doesn’t mean termination entitlements automatically revert to the common law measure of notice; there is a lot of room between the ESA minimum and common law. Provided the termination entitlements meet or exceed the ESA minimum (not only on hire, but into the future), there is flexibility in how termination entitlements accrue and at what point they are capped. For instance, an agreement could provide for one week of notice, plus an additional two weeks per completed year of service, with a maximum of 52 weeks upon termination without cause. Ultimately, a court is more likely to enforce a termination provision that provides for more than the ESA minimum, which can still provide an employer significant cost savings.
- Failing to ensure an employment agreement is signed in advance of starting work.
An employment agreement is a contract like any other; there must be an offer of employment, acceptance of that offer and an exchange of ‘consideration’ of something of value. In the context of employment, that ‘something of value’ is the job in exchange for the employee’s labour. However, if the employee already has the job prior to signing the employment agreement, the required consideration for entering into the contract is absent. This means if , down the road, the employer wants to rely on the termination provision in the agreement, the employee may argue they are not bound by the termination provision because it (the agreement) wasn’t signed before they started work.
This is an easy fix. Put into place a system to ensure any employment agreement is provided at least one week before the employee is scheduled to start work (including training) and ensure the signed agreement is returned before their first day.
- Failing to properly limit vesting of equity entitlements on termination.
Many stock option plans or grant agreements contemplate vesting ending on an employee’s last active day of employment. However, if an employee’s employment is terminated without cause, language like this may be unenforceable. For instance, in Ontario an employee is entitled to be treated as though they are actively employed, for all purposes (including vesting), for the minimum notice period under the ESA. Any language that purports to stop vesting prior to the end of the ESA minimum notice period is considered an attempt to contract out of the ESA and will not be enforceable.
Bottom line
Ultimately, employment agreements really are worth the trouble. However, employers need to be mindful of these pitfalls which can be avoided with careful attention to language and a consistent, systematic approach.
If it’s time to refresh your employment agreements, equity plan or grant document language, contact any member of the Sherrard Kuzz LLP team.
[1] Our colleague, Sarah MacKay Marton, recently addressed pitfalls (and how to avoid them) in the use of fixed term employment agreements in our November 2023 Newsletter.
