Employment Agreement Pitfalls Will your agreement stand up to court scrutiny?

Employment Agreement PitfallsWill your agreement stand up to court scrutiny? Presented By: D. Kevin Davis, Partner

Employment Agreement Pitfalls Why are employment agreements useful for an employer? -incorporating personnel policies into the employment relationship -excluding unwritten terms or promises from the agreement e.g. prior offers -reserving the right to change benefits and employee duties after hire -providing clarity for compensation package terms

Employment Agreement Pitfalls -protecting employer’s confidential information and restricting solicitation of customers by employee after termination of employment -restricting entitlements on termination of employment to that provided by the Employment Standards Act, with a view to excluding common law entitlements, including extended entitlement to bonus compensation and LTD coverage

Employment Agreement Pitfalls When will agreements not survive court scrutiny? Lack of Consideration-primarily occurs when the employee has commenced work and is given a contact afterwards without being provided anything of additional value. Ambiguity-often seen with template contracts which are not properly reviewed when prepared for each new hire. If not carefully reviewed the agreement can be nonsensical or exclude essential terms.

Employment Agreement Pitfalls Changing nature of the Employment If the nature of the employees position changes substantially over time, a contract signed on hire may no longer apply. To avoid this the following clause should be included in your agreement: This agreement will continue to govern our employment relationship regardless of any changes to your employment, including, but not limited to, changes to your position, location of employment, hours of work, compensation and benefits.

Employment Agreement Pitfalls Unwritten promises Employees will sometimes advance an argument that their agreement with the employer includes unwritten promises made on hire. To avoid this attack on a written agreement it should always include the following: This agreement constitutes are entire employment agreement and supersedes any previous written or verbal agreements between us.

Employment Agreement Pitfalls Language that does not comply with the Employment Standards Act Any provision in an employment agreement that can be interpreted to provide something less than the requirements of the ESA is illegal and can render the entire contract void! This has been the most successful line of attack against employment agreements by employee legal counsel.

Employment Agreement Pitfalls Language that does not comply with the ESA Failure to provide legislated benefits. The termination section of any agreement must be consistent with the ESA and must not exclude benefit entitlement during the ESA termination notice period

Employment Agreement Pitfalls In Stevens v. Sifton Properties the agreement included a termination clause that stated: The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice, and/or severance pay, in accordance with the ESA, You agree to accept the notice or payment in lieu of notice and/or severance pay in satisfaction of all claims and demands against the corporation which may arise out of statute or common law with respect to the termination of your employment.

Employment Agreement Pitfalls The employee was successful in having the contract struck, and was entitled to common law damages, as the court read this clause to exclude the employees entitlement to benefits during the ESA termination notice period, even though the employer had provided the required benefits after the employee was terminated.

Employment Agreement Pitfalls Language that does not comply with the Employment Standards Act Termination clauses that attempt to limit the severance payment to base salary may be void. The ESA states that where an employees compensation is variable ( non-discretionary bonus, commission or profit sharing) it must be averaged over the 12 week period preceding the termination, for the purposes of determining notice and severance pay. For employees who earn variable compensation, clauses that provided them with payments determined on base salary, thus giving them less than their average income earned during the past three months, will be void

Employment Agreement Pitfalls Language that does not comply with the Employment Standards Act Many “Just Cause” termination clauses used by employers will include a long list of conduct that will give rise to termination with cause. The ESA only provides for dismissal for cause in cases of “wilful misconduct, disobedience or wilful neglect of duty”. If termination language in your contract is broader then the ESA just cause requirements it will likely be void and the entire contract struck down!

Employment Agreement Pitfalls To avoid this the termination clause should either be the same as the wording in the ESA, or if you are providing for a severance entitlement that exceeds the ESA, then the expanded wording of just cause should refer only to the entitlements that exceed those required by the ESA. This issue also underscores the need to always include the following clause in your agreements: If any term of this agreement is found to be invalid or unenforceable, in whole or in part, the validity or enforceability of any other provision will not be effected.

Employment Agreement Pitfalls Potential conflict with employment standards legislation Termination language must comply with the ESA at all times. Language that potentially does not comply with the ESA can void the contract. For example some employment agreements state the employee will be entitled to two weeks notice/severance for each full year worked. If the employee were terminated with five and half years service they would be entitled to 5 weeks termination pay and 5.5 weeks severance pay under the ESA. This contract will be invalid even if the employee is let go at a time when their total ESA entitlement would be less than two weeks for each year worked (e.g. if let go at year ten their ESA entitlement would be 8 weeks termination pay and 10 weeks severance for a total of 18)

Employment Agreement Pitfalls Potential conflict with employment standards legislation The risk that a section of your employment agreement will be struck for this reason can be reduced by including the following clause: If the amounts or benefits to which you would be entitled to on termination are less than the amounts to which you would be entitled under the ESA, then you shall be entitled to notice, termination pay, severance pay and any other payments or benefits required by the ESA at the time of your termination. An Ontario court has yet to rule on whether this clause will ‘save” an offending agreement.

Employment Agreement Pitfalls Final Advice If you have been using the same template for many years have your counsel review it. If the template was provided by your lawyer, and they have not communicated with you concerning amendments required by recent court decisions, then you might ask why? After the Siftons’ case most diligent employer’s counsel notified their clients of the need to change their templates. If you are using a template pulled from the internet, or provided by one of the HR form services, have your employment counsel review it. Most internet agreements are worthless and some of the HR forms I have seen have not been revised to address issues arising out of recent court decisions such as Stevens v Siftons.

Employment Agreement Pitfalls Final Advice Always carefully review a template each time you use it to make sure all relevant terms “fit” the new employees terms of hire. Be careful when using the “last” employment agreement you prepared as there may have been clauses that were added, or more significantly, deleted from your template for the most recent hire.

Employment Agreement Pitfalls Final Advice Don’t be penny wise and pound foolish. These agreements are very important and can save an employer a considerable amount of grief and money when terminating an employee. Astute prospective buyers of a business will ask to review signed employment agreements. I suggest you always have your counsel review a new agreement. The cost of having a lawyer review an agreement should be viewed as a payment for “insurance” that your contract is valid and enforceable.

Employment Agreement Pitfalls If you should need any assistance regarding employment agreements, or any other HR issue, please contact me, at Kevin Davis 20 Wellington Street Brantford 519-751-6405 dkdavis@waterousholden.com

Employment Agreement Pitfalls Will your agreement stand up to court scrutiny?