an update on employment contract basics: we told you so!!!

Presented by Denyse Boulet and Melanie Polowin Gowlings' Life Sciences Group Webinar Series December 11, 2012

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

Some Lessons (Re)Learned in 2011

Presenters

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Melanie Polowin

t 613-786-0244

[email protected]

Denyse Boulet

t 613-783-8824

[email protected]

http://www.gowlings.com/OurPeople/melanie-polowin

http://www.gowlings.com/OurPeople/denyse-boulet

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

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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

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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.

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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.

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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.

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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”.

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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.

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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.

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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.

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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.

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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?

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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.

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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.”

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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!!

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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!!

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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!!

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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!!

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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.

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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.”

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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.

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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.

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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.

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• 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

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• 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!!)

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• 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.



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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.



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!!

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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!!!

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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.

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“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.”



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• 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!!



• 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.

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“…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!!!

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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.

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!

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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…

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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

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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!

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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.

•

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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.

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The Final Word

Please …don’t make us

have to tell you this again.

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Thank You

montréal ottawa toronto hamilton waterloo region calgary vancouver beijing moscow london

Denyse Boulet Melanie Polowin

[email protected] [email protected]

613 – 783-8824 613-786-0244

mailto:[email protected]

mailto:[email protected]

an update on employment contract basics: we told you so!!!

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