An Update on Employment Contract Basics: We Told You So!!!

AN UPDATE ON EMPLOYMENT
CONTRACT BASICS: WE TOLD YOU SO!!

Some Lessons (Re)Learned in 2011

Presented by
Denyse Boulet and Melanie Polowin

Gowlings' Life Sciences Group Webinar Series
December 11, 2012

Presenters

Melanie Polowin
t 613-786-0244
melanie.polowin@gowlings.com

Denyse Boulet
t 613-783-8824
denyse.boulet@gowlings.com

2

A Recap of Some Basics

1. Bones Mandatory statutory terms (unavoidable liabilities)
• human rights; labour/employment standards (“Employment Standards”);
health and safety; privacy (where legislation exists)
2. Flesh Judge-made (common law) terms, tests and rules
• the legal baseline
• some risks are avoidable if you use proper contracts and process
• some rules and tests are unavoidable
– tests for post-employment non-competition and non-solicitation
restrictions
– test for independent contractor vs. employee vs. volunteer
– proper process rules for contract sign-up
3. Clothing External contractual terms (used for risk-reduction and liability control)
• offer letters, formal contracts (formality is irrelevant)
• courts often treat handbooks, policies, guidelines and practices as part of
the contract – typically, only if pro-worker

3

The Legal Framework
1. Employment/Labour Standards (ESA/CLC)
2. Common/civil law legal tests/standards (for content
and process)
3. Contractual terms (if any, and if enforceable, ever or
still)
4. Enforceability is a function of:
− proper contracting process
− proper drafting (clear and valid terms)
− protecting the contract against lapse due to post-signing
events

4

Think of it this way:
• An employer who uses effective employment contracts
is wearing legal granny undies: they may not be
attractive, but they give the employer full coverage,
with minimal exposure.
• An employer who uses ineffective (or no) employment
contracts is wearing a legal thong: it may (or may not)
seem more attractive, but it leaves the employer over-
exposed.
• An employer who fails to preserve the enforceability of
employment contracts over time….well, you get the
picture.

5

ESA/CLC-Violating Termination Clauses:
Feel the Hate
Reminder: What is “Reasonable Notice”?
• When an employer terminates without cause, absent
an enforceable written termination provision, the
employer must provide a “reasonable” period of
advance notice of termination (“reasonable notice”) or
else provide compensation in lieu.
• Compensation in lieu includes all of the compensation
elements and benefits the employee would have
received if he/she had stayed until the last day of the
reasonable notice period.
• Reasonable notice is the legal default position, not
ESA/CLC.

6

Feel the Hate
We told you and we told you and we told you:
• Courts hate ESA/CLC-only termination clauses
• They are widely viewed by employees and Courts as
unfair
• Very challenging to draft them properly, and to
preserve their enforceability over time
• Courts will jump at any valid legal excuse to
ignore/override an ESA/CLC-only termination clause
• Even when a clause gives more notice/severance than
ESA/CLC, Courts will still be inclined to ignore/override
it, if it could potentially violate any ESA/CLC
requirements.

7

Feel the Hate
• You need comprehensive termination clauses for all
your contracts and all your incentive plans (equity or
cash based)
• Your clauses need to clearly explain what happens to
every compensation element under every possible
termination scenario:
− death
− disability
− resignation
− termination with cause
− termination without cause
− sometimes also (for senior employees or in M & A
situations), termination in connection with a “change in
control” and/or resignation for “good reason”.

8

Feel the Hate
• For termination without cause, even if you are cash-
strapped, instead of ESA/CLC-only clauses, you are
much wiser to use a termination provision that is:
− easily adapted to different positions
− gives certainty as to amount and timing
− scales up over time via a service-based formula with a
reasonable floor and a reasonable cap
− gives at least some modest amount above ESA/CLC
minimums
• Your clauses, as written, can never give less than
ESA/CLC minimums. Any floor and any ceiling (cap)
must respect ESA minimums at every stage of
employment.

9

Feel the Hate
• If you are ESA-governed, you’ll need to explicitly
reference both ESA notice and ESA severance, even if
right now you are way too small to meet the $2.5
million threshold for severance obligations
• Your clauses, as written, cannot violate all those nitty-
gritty technical ESA/CLC rules:
− how statutory pay in lieu and statutory severance are
calculated (averaging rules if earnings are variable)
− service bridging rules for multiple periods of service
− accumulation rules for calculating statutory severance
− vacation accrual over the statutory notice period
− which benefits/perks must be continued during the
statutory notice period.
10

Feel the Hate
• Some of you doubters out there also believe that an
ESA/CLC-violating clause will fail only if there is an
actual violation at the point of termination (i.e., if the
clause gives less than ESA/CLC to the employee right
then).
• But since the early 1990s, Courts have repeatedly held
that even if the clause is fine at the point of
termination, and would only violate ESA/CLC rules at
some theoretical future point (i.e., if employee was
employed for longer and/or employer’s payroll later
grew to hit the $2.5 million threshold for ESA
severance), it will fail from the get-go.

11

Feel the Hate
• So…if termination clauses, as written, lead to any
actual or potential ESA/CLC violation, that is a fatal
flaw. The clauses will be unenforceable.

12

Feel the Hate
• But what if the employer “fixes” the flaw by complying
with the ESA/CLC requirements at the point of
termination?
• In other words, can an employer “save” (and rely on) a
fatally flawed clause, by giving the employee the
“missing” entitlement anyhow?
• Or by giving extra?

13

Feel the Hate
Wright v. The Young and Rubicam Group of
Companies (Wunderman), 2011 ONSC 4720 (CanLII)
gives us some clarity on this issue.
Facts:
− Company was Ontario ESA-governed
− Wright was hired in 2005 in executive role
− Employment contract signed at hiring included termination
clause that scaled up the amount of notice/severance over
time (ranging from 1 week during his probationary term, to
a maximum of 34 weeks’ Base Salary after 19 years)
− Wright was terminated without cause shortly after his 5th
anniversary
− At time of termination, contractual notice exceeded ESA
notice/severance owing.

14

Feel the Hate
Facts continued:
− Termination clause only addressed notice – it did not
mention ESA notice or ESA severance, and did not
address effect of termination on vacation or other
compensation elements
− However, employer did in fact comply fully with (and
exceed) all ESA requirements regarding non-salary
compensation, when paying out the termination package
− Termination clause concluded with these words:
“This payment will be inclusive of all notice statutory,
contractual and other entitlements to compensation and
statutory severance and termination pay you have in
respect of the termination of your employment and no other
severance, separation pay or other payments shall be made.”

15

Feel the Hate
Court held:
1. The termination clause was void due to a potential
future violation. As written, notice provided would
have been less than total ESA notice/severance
required, if termination had taken place at different
stages of service.
We told you to do the math!!
We told you to ensure there was no potential
breach!!

16

Feel the Hate
Court held:
2. The termination clause was also void due to an
immediate violation. The meaning of the concluding
words of the clause was plain: it meant that no other
payment or compensation would be owing. But
benefits are part of compensation. ESA rules
governing non-salary compensation clearly provide
additional entitlements. So the contract, as written,
purported to give less than what was legally
required.
We told you to remember to deal with non-
salary items!!

17

Feel the Hate
Court held:
3. The clause could not be saved, even if the employer
tried to remedy the flaw by meeting and exceeding
all ESA requirements. It was fatally flawed as
written, and thus invalid from the get-go.
We told you so!!

18

Feel the Hate
“There is, in my view, no particular difficulty in fashioning
a termination clause that does not violate either the
minimum standards imposed by the Employment
Standards Act or the prohibition against waiving statutory
minimum requirements and there is no compelling
reason to uphold a termination clause which the
draftsman may reasonably be understood to have
known was not enforceable either at all or under
certain circumstances.”
We told you so!!

19

Feel the Hate
Lessons (re)learned:
1. Avoid using ESA/CLC-only termination clauses.
Give something more.
2. Draft carefully and comprehensively. Remember –
reasonable notice covers all compensation elements,
not just salary. Either address non-salary
compensation aspects explicitly, or include a
“savings” basket clause (“we will comply”) applicable
to all non-salary compensation and benefits.
3. Do the math!!!! Make sure your totals will always
meet or exceed ESA/CLC requirements.

20

Feel the Hate
4. Always, always, always use “saving” language.
“Unless otherwise strictly required under the ESA …..”
5. It is best to include a “that’s it, that’s all” clause, but
make sure you say, somewhere in the contract, that
ESA/CLC will prevail no matter what.
“Notwithstanding anything in this Employment Agreement, if the
minimum requirements of Employment Standards provide you
with any greater entitlements than those set out in this
Employment Agreement, the Company will provide you with
such greater entitlements in substitution for those set out in this
Employment Agreement.”

21

Feel the Hate
And don’t forget…we told you and we told you and
we told you:
• Even if you have great termination clauses, if you don’t
follow proper contracting process rules (fresh
consideration), your contract may be unenforceable
from the get-go.
• Even if you have a great contract and you follow
proper contracting process rules, the contract can
still become unenforceable (lapse) for a variety of
reasons, including situations where the employer itself
breaches the contract through wrongful or constructive
dismissal.

22

Post-employment Restrictions:
Carved down or kicked out?
Reminder: What are the common law rules?
1. The law treats competing differently from soliciting.
Do not confuse/conflate the two!
2. During employment, all employees, at every level,
owe a duty of good faith to their employers, so they
cannot undertake activities that harm the employer’s
interests.
3. Both during and after employment, regardless of why
employment ends, employees can never misuse
confidential/proprietary information of the
(ex)employer.
4. After employment ends, absent an enforceable
written restriction, regular (non-fiduciary)
employees are free to compete and solicit.
23

5. After employment ends, absent an enforceable
written restriction, fiduciary employees are free to
compete. However, for a reasonable period of time
(typically, about 3 to 6 months), they cannot solicit
staff or customers for purposes harmful to the ex-
employer.
6. To be enforceable, the restriction has to meet
common reasonableness and public policy tests, it
has to be signed through proper contracting
processes (and then preserved), and it has to be
clear and unambiguous.

24

• A non-compete is only enforceable in exceptional
circumstances and not against ordinary employees
(mainly, “inner circle” top management - anyone
else…you’re bluffing!)
• Employer must draft a clause that is reasonable, clear,
unambiguous, and readily applied, now and later, so
employee can easily understand what is (and is
not) allowed

25

• Courts will not carve down excessive limits or
substitute enforceable limits/terminology…instead,
they will throw out the baby with the bathwater unless
intentions are crystal clear
• Avoid “one size fits all”, and narrow scope as much as
possible (don’t overreach!!)

26

• For non-solicits, focus on connections/relationships
(who did employee really know and deal with within a
reasonable period before termination)
• Courts have been pretty active in this area, making it
harder and harder to impose restrictions by nit-picking
at content and closely scrutinizing process…so you
have to review and update your templates and
practices frequently.

27

Foreign Exchange Corporation v. Kelcher, 2011
ABCA 240 (CanLII) took a very (arguably overly)
strict approach to a non-solicitation clause.
“… solicit customers in any manner whosoever, in any
business or activity for any client of Globex with which
he/she had dealings on behalf of Globex at any time
within the twelve (12) months preceding the date upon which
the Employee left the employment of Globex.”

The Court found the clause was fatally flawed in 3
ways.

28

Court held:
1. The clause was overly broad because it did not
confine the non-solicitation to Globex’s actual
business (foreign currency exchange). Instead, it
purported to apply to “any business or activity for any
client of Globex”, even if that business or activity was
totally unrelated to foreign currency exchange.
We told you not to over-reach!!

29

Court held:
2. It was unclear. On its face, the clause only
prohibited soliciting efforts “for any client” with whom
the employee had had dealings, but presumably
Globex did not want ex-employees to solicit
customers for other (non-client) competitors too.
We told you to be crystal clear!!!

30

But this was the one that surprised us.
The Court held:
3. The term “dealings” was ambiguous both in meaning
and practical application. How, then, could an
employee know with certainty when his/her last
dealings had taken place?
Accordingly, the clause was fatally flawed and
unenforceable for content-related (drafting) reasons.

31


“If it is impossible to predict when you are breaching
a restrictive covenant, it is in essence unreasonable.
…If the meaning of a restrictive covenant cannot be
ascertained, I do not think a court should enforce it.”

32

• But even if the clauses had been well-drafted and
reasonable, the Court would still have (rightly) refused
to enforce them for process-related reasons.
• Firstly, Globex could not seek to enforce a contractual
clause when Globex itself breached the same contract
by wrongfully dismissing the employee.
“An employer that wrongfully terminates a contract of
employment should not be able to capitalize on its failure to
give notice or damages in lieu of notice by enforcing
prospective obligations against an innocent employee.”

We told you so!!

33

• Secondly, two of its employees were already employed
by Globex when Globex forced them to sign the new
agreements with the disputed clause.
• Globex could not seek to enforce the contractual
clause because Globex had not provided fresh
consideration to those employees in exchange for
their signature of the new contracts. Nor could Globex
prove that it intended (or the employees understood)
that they would be terminated without cause, if they
had refused to sign the new agreement.

34

“…continued employment alone does not provide [fresh]
consideration for a new covenant extracted from an
employee during the term of employment because the
employer is already required to continue the employment
until there are grounds for dismissal or reasonable notice of
termination is given.”

We told you so!!!

35

1. Clarity is critical. Define terms. If you cannot
readily understand what it means, it won’t be
enforceable.
2. Stop over-reaching. A brief period of real
protection of core customers is a bird in hand… the
illusion of longer/broader protection is two in the
bush.
3. If you don’t follow proper sign-up processes, your
paper is worthless!
4. If you breach your own contract, you can’t enforce
it.

36

The “Duck Rule”:
When Contractors are Employees
• Even if both sides want and agree to
consulting/contractor arrangements, sometimes the
law just says “No!”
• There is no single test or fixed list of questions to
determine if an arrangement will qualify as a true
consulting relationship
• Misclassification is a risk for both parties, but the
risks/costs are worse for employers
• You need proper paper…without that, you have no
hope!

37

Remember the “Duck Rule”?
• The more a consulting/contractor relationship
looks/operates like an employment relationship, the
more likely it is that the law will view the relationship as
either:
a) a deemed employment relationship; or,
b) a dependent contractor relationship.
• Either way, it costs you money, hassles and
headaches.
The way you want it to be, is often not what it will
turn out to be…

38

Step 1: total relationship assessment (“TRA”)
− level of employer control/supervision over work
conditions and work product
− who provides tools/equipment
− who bears financial risks of loss
− who bears expenses
− who has opportunity to profit (up-side potential vs. fixed
fees)
− exclusivity/duration of relationship
− freedom to sub-contract
− contractor’s conduct as a business/self-employed person
− contractor’s responsibility for investment/management
TRA factors may be neutral or tip toward one side
or the other
39

Step 2: Intention assessment
− stated intentions of the parties are not determinative, but
common intention will have considerable weight
− intention is evidenced by documentation (contracts,
invoicing, GST/HST registration, filings/reporting as
business or self-employed person)
− intention is also evidenced by de facto operation of
relationship (substance over form)
Documents do NOT trump actions!

40

Step 3: On balance, does it look like a duck? walk
like a duck? quack like a duck? If so…it’s a duck.
TBT Personnel Services Inc. v. Canada, 2011 FCA 256
(CanLII): absent a written agreement, it may be
impossible to convince a Court that the worker is a
contractor.

41

1. Choose wisely. Employment is the safer bet.
2. Understand the risks:
− contractors do not have the same duty of good faith
− employers have much less control, with no automatic
ownership rights over work product
− misclassification will cost money, interest and penalties,
and will invalidate your contract.
3. Paper it! Limit/control the risks via proper
documents with protective and fall-back provisions.
4.Then, support the paper by walking the walk and
talking the talk.

42

The Final Word

Please …don’t make us
have to tell you this again.

43

Thank You

Denyse Boulet Melanie Polowin
denyse.boulet@gowlings.com melanie.polowin@gowlings.com
613 – 783-8824 613-786-0244

montréal  ottawa  toronto  hamilton  waterloo region  calgary vancouver  beijing  moscow  london

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An Update on Employment Contract Basics: We Told You So!!!