Employment Contracts – Are They Worth It?

Being an employer sure comes with many challenges. During the period of employment the challenges include following employment standards, workers compensation, and human rights legislation.  When employment is ending those regulations can also apply as well as the common-law rules for dismissing employees.

Whenever an employee is dismissed, there is a risk that the employee will bring a court action against the employer.  As many court decisions show, employers can end up paying substantial amounts in monetary damages.  Unless the employee was dismissed for just cause – which is often difficult for the employer to prove –  damages can be awarded for wrongful dismissal, as well as for mental distress caused by the manner of dismissal, and breach of human rights standards.  In rare cases, where the court strongly disapproves of the employer’s conduct, punitive damages can be added to the employee’s award.

Under the common-law, damages for wrongful dismissal are calculated based on the employer’s duty to give ‘reasonable notice’ to the employee of the dismissal.  Reasonable notice can be “working notice” where the employee continues to work until the dismissal date, but employers often prefer to pay the employee’s wages for the notice period or “pay in lieu of notice.”  If the employee sues the employer claiming wrongful dismissal, the court will decide whether the notice period (or payment in lieu) was long enough to be reasonable notice.  The court will consider many factors, including the employee’s age, level of responsibility, length of employment, any promises made to the employee by the employer, as well as the state of the job market at the time.  For these reasons, it is not easy to predict what the common-law reasonable notice period is for a particular employee at a particular time.

What About Employment Contracts?

Having a written employment contract can reduce the employer’s risk when dismissing the employee without just cause.  If it is effective, the reasonable notice period will be limited to an amount that is at least equal to the statutory minimum notice period, as required by the Employment Standards Act. (The statutory minimum notice period also applies when there is no written employment contract).  This benefits the employer because the alternative, the common-law reasonable notice period, is generally longer than the statutory minimum notice period.

However, even a well-written employment contract will not always be enforced by the court.  To be enforceable, a written employment contract must be clear in its terms, and must also demonstrate that both parties intended those terms to be binding.  Ideally the contract is made at the hiring stage; an employer who wants to bring in a new written employment contract with existing employees should use extra caution.  Also, the common-law considers the employment relationship to include special protection for employees, including adding implied terms to written employment contracts.  Other protections are found in provincial laws such as the Human Rights Code and Employment Standards Act.

Given the challenges and complexity of the law in this area, an employer who has or wants to create a written employment contract can really benefit from legal advice.

For more information on this or any other employment-related issue, please contact us.


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