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Don’t fear employment agreements

Agreements can limit notice periods, won’t cause candidates to flee for the exit

By Stuart Rudner

Last week, I was part of a panel at the HR Law Conference put on by the Human Resources Professionals Association (HRPA) in Toronto.

It was an open question and answer session, and one issue that came up repeatedly was the strategic use of employment agreements. I was not the only one to say I encourage clients to use employment agreements for every single employee in their organization. What is interesting is that, although many of us have been spreading that message for years, there continue to be concerns raised about the enforceability of termination clauses, the viability of employment agreements and the optics of asking a potential new hire to sign a “legal” document. In my view, none of these concerns are warranted, and it is short‑sighted to make a deliberate decision not to use proper employment agreements for all employees.

We are all familiar with the “typical” hiring process. During the course of discussions with an applicant, issues such as position, duties and compensation will be discussed. However, very little else will be addressed before the time when the organization’s representative offers the applicant the job. Once the applicant has accepted, she is told when to show up for work.

Sign contract before day one

When the individual arrives for the first day of work, what most people don’t realize is that there is already a contract in place. Since there is nothing in writing, the contract is a verbal one. In addition to the terms which were explicitly agreed upon, the law will imply a substantial number of other terms. The same is true in situations where an individual was hired pursuant to a brief letter of hire. There is a contract, and it is comprised of the terms that are addressed in that letter and a number of terms that will be implied by law.

One of the terms implied by law is related to notice of dismissal. The termination of the employment agreement is governed both by statute and by common law. All statutes in Canada provide a minimum amount of notice that must be provided in the event of a dismissal without cause. They play out to be roughly one week of notice per year of service, with a cap (in Ontario, for example, the cap is eight weeks). However, in the absence of a binding contractual agreement to the contrary, the common law will add an implied term entitling employees to “reasonable notice.” While the statutory amounts are easily calculated, the common law requirement is not.

Common law notice periods are difficult to predict with certainty and are substantially greater than the statutory requirements.

As I tell our clients, if they want to avoid the uncertainty and onerous obligations created by the common law, there is a simple way to do so: Have the employee sign a binding employment agreement that contains a term specifying exactly how much notice will be required in the event of dismissal without cause.

Many people are of the view such a clause will not be enforceable. That is entirely inaccurate. Generally speaking, there are two conditions that must be met in order to rely upon the dismissal clause. First, the clause itself cannot provide for notice that is less than the statutory minimums. Even if it has the potential to do so, it will not be enforceable. For example, a clause which says an individual will be entitled to three weeks’ notice in the event of dismissal may be providing more notice than the worker would be entitled to after one year, based upon the statute. However, after four years, the statute would require four weeks, which is more than the contract. In those circumstances, most courts will say the clause is unenforceable at any time.

The second requirement is that the contract itself be entered into in a manner that will be enforceable. What I often see is that organizations follow the process set out above, and when the individual arrives for work on their first day, they are asked to sign a number of forms, including an employment contract.

At that point, it is too late — there already is a contract in place. In order to replace the existing contract for the new one, the organization must offer the employee something of value in order to accept the new terms and conditions that are being proposed. In order to avoid this scenario entirely, I tell clients to “make the agreement the offer.”

In other words, when the decision has been made to offer employment to the applicant, you should say something along the lines of “We would like to make an offer of employment to you in accordance with the terms and conditions set out in this contract.” At that point, if the meeting were face to face and the contract was available, you would pass it over to the applicant. If the meeting is not face to face, or the contract is not yet ready, you can advise it will be provided shortly.

Either way, the individual should then be provided with a sufficient opportunity to review the contract and obtain whatever professional advice she deems appropriate. It must be made clear she has not been hired, and is not an employee of the company, until she signs, indicating acceptance of the offer.

I am often told presenting a lengthy legal document to an applicant at the time of hire will send a negative message. Some clients ask for “just one or two pages.” First, I have never heard of a situation where an individual that would have liked to work for an organization decided not to simply because they were presented with a lengthy document. They may object to the terms contained therein, and that is a different matter altogether. There can, of course, be some negotiation. However, just as you would not arbitrarily remove clauses from your insurance contract, I would not recommend you arbitrarily remove clauses from an employment agreement you hope to rely upon. So long as the terms are reasonable, it should not cause the potential employee to run in the other direction.

Termination clauses

That brings me to another objection that I often hear: Employers don’t want to use termination clauses because they don’t want to be too harsh. As I tell our clients, there is nothing that says the agreement must be oppressive. You can provide terms that are as generous as you like; however, at least everyone will know exactly what their rights and obligations are, and they will not have the uncertainty of determining what “reasonable notice” would be some time down the road.

I have heard many reasons why organizations prefer not to use employment agreements. However, I have yet to hear a compelling one. When it comes time to dismiss an employee, organizations that did use an employment contract with a valid termination clause will reap the rewards.

Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or srudner@millerthomson.com. You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.

Stuart Rudner

Stuart Rudner, Employment Lawyer and MediatorStuart Rudner is the founder of Rudner Law (RudnerLaw.ca), a firm specializing in Employment Law and Mediation. He can be reached at stuart@rudnerlaw.ca, (416) 864-8500 or (905) 209-6999, and you can follow on Twitter @RudnerLaw.
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  • Don’t fear employment agreements
    Tuesday, November 1, 2011 7:27:00 PM by Stuart Rudner
    Absolutely. If it is done properly.