For employers and employees, the overarching benefit of a good employment contract is certainty. Both parties can arrange their affairs knowing the terms of the written contract will govern their relationship.
While the common law provides rights and imposes obligations in the absence of a written contract, the use of a contract allows the parties to create certainty in many other areas of their relationship.
For example, an employee can be assured corporate amalgamations or restructurings will have to account for her existing terms of employment. She can consider other employment opportunities or plan for her retirement knowing which benefits and obligations may arise from her choices.
An employer, in turn, can make better decisions on hiring, terminations, replacements and reorganizations when armed with information on the costs of such decisions. Good employment contracts facilitate budgeting and strategic and succession planning. They can also make for easier conversations with employees.
One obvious benefit of certainty is the avoidance of litigation. Under contract, neither party has its rights and obligations subject to the vagaries of a changing common law landscape or the contingencies of litigation, including the idiosyncrasies of any particular arbitrator or judge.
Further, litigation is expensive, often prohibitively so, not just with the legal fees but the uncertain nature of litigation. Employers must also consider the loss of time for those people involved with the litigation, who are often management-level employees.
Why does a written contract discourage litigation? In wrongful or constructive dismissal claims, employees often sue because of what feels like (and may actually be) arbitrary and unfair treatment. This perception will flourish in a contract-free environment, where the parties are left to evaluate their rights, often without consulting counsel.
Where a terminated employee takes his contract to a lawyer for review, he will have a better understanding of his legal entitlements and obligations. He may also abandon any thoughts of legal action or at least be more likely to demand or negotiate payment without resorting to litigation.
For example, a long-term employee may have originally agreed to a minimum amount of severance pay but now expects more based on his years of service. If a lawyer believes the termination provisions are enforceable, there may be little gain and much risk in proceeding against the employer, and he may be dissuaded from seeking damages.
Clearly setting out the terms of the relationship in a written document may discourage posturing and ultimatums based on more emotional responses to circumstances. For example, clearly spelled out formulas for bonus payments will reduce the time and money that might otherwise be taken up dealing with unhappy employees who felt their performance warranted more than was received.
Written employment contracts that spell out an employer’s expectations of an employee can also work to modify an employee’s behaviour. Subject to human rights and privacy legislation, an employment contract (or policy incorporated into the contract) can address issues of respectful workplace expectations, drug and alcohol use, licensing requirements, rights to intellectual property, protection of proprietary information and Internet or social media use. It ensures the employer is hiring people who respect those policies and gives the employer a legal cause to terminate employment if they fail to do so.
Employment contracts may also limit future competition from key employees through restrictive covenants, if done with minimal intrusion on their rights. While this may seem unfair, the courts will only enforce contracts that minimize these restrictions as much as possible. And a well-advised employee will have negotiated an employment contract that provides consideration for the restriction, such as a severance pay period that corresponds to the non-competition period.
Creating the contract
For the employer, it is important to maintain some flexibility in the contract. For example, instead of a strictly mathematical bonus formula, an employer may want the ability to pay bonuses in a less formulaic way, allowing for subjective preferences or reallocation of funds within the company.
Employment legislation generally provides minimal protections to non-exempt employees that cannot be varied by contract, such as minimum pay, maximum work hours, overtime and vacation pay, parental leaves and obligations on termination. It is vital that any employment contract accord with these statutory obligations.
Outside of this, however, the parties can agree on any number of items. Depending on the industry, an organization may require employees to be flexible in terms of hours or relocation.
A contract can also limit an employer’s exposure by addressing benefits, commission structures, expense reimbursement, the right to offset debts against wages and, of course, severance pay.
Michele H. Hollins is a partner at Dunphy Best Blocksom law firm in Calgary and civil litigator with a focus on employment law. She can be reached at firstname.lastname@example.org, (403) 750-1117 or visit www.dbblaw.com for more information.