Hiring smart in uncertain times: Legal safeguards for Canadian employers

In a turbulent economy, even a surge in demand comes with a caveat: what if it doesn’t last? That’s why Canadian employers should embed flexibility directly into their employment agreements, say two employment lawyers speaking with Canadian HR Reporter.

“In this environment, there's lots of employers that would be concerned that things might change,” says Dan Bokenfohr, partner at McLennan Ross in Edmonton, and that could mean a surge in demand, especially with the “Buy Canadian” movement.

“But if they're not confident that that will last… what employers want to do is at the outset of the... employment relationship, when you're extending that offer of employment, put some protections in there, to give the employer greater flexibility.”

In a climate of unpredictability, employers should avoid shortcuts and instead prioritize well-drafted agreements, he says.

"Take the time to be thoughtful about setting out expectations at the front end of the relationship… If employers do that, they'll be in a much better position to react to volatility and what they're seeing around them in their industry and the broader economy.”

Avoiding pitfalls of ‘splitting the offer’

In fast-paced hiring scenarios, employers may offer verbal assurances before formal paperwork is complete — a misstep called “splitting the offer,” according to Prateek Awasthi, associate at Mathews Dinsdale in Toronto.

“It can become tempting for an employer to say, ‘Here's your salary, here's the position, here's the hours of work, and we'll send you the paperwork later.’

And that can mean employment began with that first offer, “but the second set of documents... are not enforceable because there was no fresh consideration provided," he warns.

Instead, it's much better to say, “Take a look at the offer that’s attached in this document” or “An offer will be forthcoming,” says Awasthi, who adds that any employers using temporary help agencies should know they must be properly licensed in Ontario.

Fixed-term contracts: Use with care

A lot of employers think intuitively that in a climate of economic uncertainty, they would rather enter into a fixed-term contract — as opposed to an indefinite or permanent employment contract.

But fixed-term contracts can have certain risks, says Awasthi.

"The biggest among them is if an employer intends to terminate the contract before the term, depending on what the termination language is like, a court might award reasonable notice to the end of that term," he says, adding that a poorly worded fixed-term agreement can leave employers liable for months — or even years — of wages.

“It almost it is better, in our view, to have an indefinite contract with the strong termination clause compared to a fixed-term contract that has a weak termination clause.”

Fixed-term roles — if used — must be tightly defined, says Bokenfohr.

"It is possible for the employer to put a clause in the hiring package that clearly says, ‘This is what we’re hiring you for, it’s not on an indefinite basis,’" he says, adding it should set out the parameters.

“At the end of it, there would be no obligation to provide severance in that unique situation.”

But forgetting to include a termination clause, or repeatedly renewing the contract, can undermine its fixed-term nature, says Bokenfohr.

“A court would look at it and say, ‘This is really an indefinite relationship, and you owe this person reasonable notice if you're going to terminate them without cause.’”

Independent vs. dependent contractors

The rise of gig work has tempted many Canadian employers to classify hires as independent contractors, assuming this structure limits liability.

But that can also be a trap, according to the two lawyers.

“One of the common mistakes employers make is to think that if they entered into an independent contractor agreement with someone, and that that person invoices them on a regular basis, and that if they didn't make any deductions or withholdings, then that person will be treated as an independent contractor,” says Awasthi.

But that's not necessarily true. Courts examine actual working conditions, such as exclusivity, hours, integration with staff and control.

“A court might decide, regardless of how the parties describe that relationship between them, regardless of the wording of the contract… that it actually resembles an employer-employee relationship,” he says.

The courts look at the reality of the situation — not the label, says Bokenfohr.

“If they're, in actuality, operating like an employee, working alongside your employees, working in an integrated fashion with your employees — and if they're working exclusively for you, or nearly exclusively for you, such that they depend on you to earn in livelihood — you're going to have real trouble, at the end of the day, treating them as a independent contractor.”

Bokenfohr notes that courts have also created a middle category: the dependent contractor,

"You're working exclusively for this one entity, the courts recognize a dependency between the contractor and the company to earn a livelihood and, because of that, they imply an obligation to give notice as well on termination," he explains.

To reduce risk, employers should include termination provisions in any contractor agreement and make sure the working relationship matches the contract’s language.

“It's probably far better to agree to give some amount of notice when terminating than no notice at all,” says Bokenfohr.

Probationary periods: A crucial window

Of course, an important tool for reducing risk in hiring – especially if an employer is ramping up during an upswing — is probationary periods, to assess the suitability of a candidate for employment.

Bokenfohr says that aligning the probation period with provincial employment standards — for instance, 90 days in Alberta — ensures employers can terminate without notice during that window.

“And, if things change during that 90-day window, if you've got a good probationary clause written into your agreement, you're able to part ways without any severance costs. So that's one protection.”

But they come with their own set of legal nuances. For example, some employers mistakenly assume statutory provisions are sufficient, failing to specify termination terms within the probationary period itself, says Awasthi.

“Employers sometimes think that they don't need that in the contract, but what you find under the Employment Standards Act only relates to the notice of termination or pay in lieu of notice within the ESA. There can, however, be liability at common law,” he says.

"Employment contracts... should include a specified probationary period," Awasthi advises, and "define specifically what will be considered as a probationary period and whether the employer will assess suitability during that time."

And timing matters. Extending probation beyond that point without proper language could trigger notice obligations under the law, says Bokenfohr.

“That can be a trap that employers fall into — they simply say, ‘We can terminate you during the probationary period without notice,’ and then they make the probationary period longer, say, six months, and it's not really enforceable,” he says. “You can't make a probationary period last forever without there being consequences.”

If you do let someone go during the probationary period, having a termination clause that says, “We can terminate you for any reason during probation without giving you a notice or any lawful reason,” will provide added protection, says Bokenfohr.

Avoiding constructive dismissal claims with changing roles

During volatile periods, employers often need staff who can pivot roles, adjust hours, or temporarily reduce their workload. But unless those terms are present in a contract, it can become grounds for constructive dismissal, says Awasthi.

“If the [employer] hired a person for a particular position, and let's say, in a dynamic business environment, you suddenly needed that person to do something else, if that was an essential term of the contract, you can't change it unilaterally,” he says.

“But, if you had a provision in the contract saying, ‘Here's what you're doing now, but you recognize that over time, things might change,’ and you build in some flexibility in that contract — in terms of what work the person does, where they work, whether it's remotely, in-person or from one location to another, what the hours of work are, what the shifts are… then you can have flexibility, but those are some things that you want to think about ahead.”

However, it's hard to give an employer “carte blanche” to do whatever they want in advance on important terms like compensation and the essence of what someone is doing in their job, says Bokenfohr.

“Those are pretty fundamental things… and it tends to be a matter of degree with those,” he says.

“You may need to adjust those sorts of things, but the courts are always going to, I think, scrutinize that and see if it's a significant decrease in pay or regular hours of work or level of job that you're asking the employee to perform, [and they’re] going to consider that a constructive dismissal.”

However, if the employer proposes changes that are reasonable and justified under the circumstances, the employee might accept them, adds Bokenfohr.

Knowing the rules for temporary layoffs

Temporary layoffs can also be “a very effective tool” for employers planning workforce changes in an uncertain climate, he says.

“You want the ability to say, ‘We need to just pause things here. We don't have enough work to keep you busy right now, but we think that that demand may come back in the short term.’”

But, again, that kind of stipulation should be addressed in advance.

“When you hire the individual, address it in the offer to say, ‘Look, we're hiring you on these terms, these hours of work, etc. But we're going to need to reserve the right to temporarily lay you off should we get into a situation of decreased demand or workflow disruptions or whatever.’ So, you find a way to address it and put it into the agreement, just to identify that as a possibility,” says Bokenfohr.

If you don’t, the employee could be taken by surprise and treat the layoff “as tantamount to termination,” he says, raising the risk of a constructive dismissal claim.

And if there is a good termination provision in there, even if the employee doesn’t agree to the temporary layoffs, “that also covers a constructive dismissal situation, just the same as it would if you were expressly terminating them,” says Bokenfohr.

As with many things, the devil's in the details, he says, but the courts have consistently taken the approach that because employers tend to have the upper hand in the bargaining relationship — particularly at the time of hiring, particularly for low- to medium-level employees — so they are more sophisticated and in a better position to bargain.

Because of that, employers should have clear and precise language with employment contracts, says Bokenfohr, because the courts will “read any ambiguity in favour of the employee.”