EMPLOYMENT CONTRACTS –PROTECT YOUR ORGANIZATION

Arlene O’Neill

THE BENEFITS OF AN EMPLOYMENT CONTRACT

•Unambiguous and clearly drafted employment contracts can reduce future termination costs and other disputes down the road•Ambiguities are construed in favor of the employee

Employment Contracts

Topics Discussed:

1. Probationary Periods2. Termination Clauses3. Benefits Clauses4. Equity Participation or Profit Sharing Plans5. Non-Competition and Non-Solicitation Provisions6. Tricky Terminations – Executive Termination

PROBATIONARY PERIODS

•The Employment Standards Act provides for a probation period:

• Section 54 states that no employer shall terminate an employee who has been continuously employed for three months or more unless the employer has given written notice or pay in lieu of notice

•Caution: despite the ESA, a probationary term will not be implied into a contract

PROBATIONARY PERIODS

Principles Governing Probationary Period Clauses:

• Terminology• Length of Probationary Term• Purpose of Probationary Term• Probation as a Disciplinary Action

PROBATIONARY PERIODS

Terminology

•Word “Probation” must be expressly used in any written contract

•References to adjustment periods or company policies will not imply “probation” period

PROBATIONARY PERIODS

Length of Probation Term

•Typical length is 3 months (corresponds to employee benefits)•Where probationary term exceeds 3 months –contract should provide employee will receive the Employment Standards Act minimum notice of termination if dismissed after three months but within the stated probationary period

PROBATION PERIODS

Length of Probation Term

Example – 6 month term:

“The employer may terminate the employment without cause or any form of termination payment within the first three months of probation and may terminate after three months by providing the minimum pay in lieu of notice provided by the ESA during the 6 month probationary period.”

PROBATION PERIODS

Purpose of Probation Term

•Include in employment contract provision the specific purpose of the probation period

• I.e. assessment of a probationary employee’s suitability for the position

PROBATION PERIODS

Probation as Disciplinary Action

•Can be enforced as a disciplinary action•Employer must include a provision that states that employer may place employee on probation as a disciplinary action

TERMINATION CLAUSES

•Difficulties associated with alleging “cause” for termination – only clear cases will be effective•Therefore employer may want to limit the amount of notice or pay in lieu of notice in the contract for employment as an added precaution

TERMINATION CLAUSES

Principles governing limited time termination clauses• The contract cannot provide for less notice than that

required under ESA, 2000 or the provision will be null and void

• The contract must specifically provide that the ESA applies. Cannot state “provincial law.” It must name the legislation.

• Since the ESA states minimum notice will be “at least” a particular period of time, a provision that merely states that notice will be “in accordance with the ESA” may not be clear enough.

TERMINATION CLAUSES

Example

“Should you be terminated for reasons other than cause, then you will be entitled to a minimum of 8 weeks notice, or pay in lieu of notice, or such that is required by the Employment Standards Act, whichever is greater”

TERMINATION CLAUSES

Caution: attempting to limit common law rights to lesser contractual terms AFTER employment has already commenced MUST be in exchange for some consideration to be legally effective

BENEFITS CLAUSES

•Continuation of the employment relationship does NOT require ACTIVE employment•Also, benefits (I.e.: stock options, housing allowances, automobile benefits, etc.) can form part of the employment contract whether or not they are contained in the same contract

• These ancillary benefits will CONTINUE into the NOTICE PERIOD where the employer does not contract otherwise

BENEFITS CLAUSES

Example:ABC Co. wishes to terminate one of its directors without cause. The director’s contract for employment states that his stock options can be exercised within 30 days.

• The former director will have 30 days after the end of the notice period (which may be very long depending on whether the common law is applicable) to exercise his stock options

BENEFITS CLAUSES

Stock Options

•Wording of stock options clauses must be unambiguous and clearly indicate that the rights to exercise end on the date of dismissal•Otherwise, stock options will vest during the reasonable notice period to wrongfully dismissed employees

EQUITY PARTICIPATION OR PROFIT SHARING PLANS

•Equity participation or profit sharing plans are sometimes preferable to the payment of a bonus or grant of stock options•However, beware ambiguous terms surrounding:

• “date of grant”• “vesting”

• These must be very specifically defined

NON SOLICITATION COVENANTS

•Purpose: to prevent terminated employee from soliciting customers with whom he or she did business while in the employ of the employer.•Must be specific•Generally more enforceable than non competition clauses

NON COMPETITION CLAUSES

•Purpose: to prevent a terminated employee from joining a competitor of their former employer or establishing a competitive business•Beware – these clauses must be strictly drafted or else they will be unenforceable

NON COMPETITION CLAUSES

Principles governing interpretation:•Employer must have legitimate interest that requires protection•Clause must be restrictive in scope•Clause must be limited as to time, geographic area, and competitive activity specified. •Public interest

EXECUTIVE TERMINATION

Tricky Termination – Terminating the Executive Employee(Key executives of the Company, holding titles such as CFO, President, director or officer positions)

EXECUTIVE TERMINATION

Complications may include:1. Executive may have company property at the employee’s home or registered in his/her name –issues of return of company property;2. Executive may be entitled to lengthy benefits and notice of termination at law – termination is expensive: and3. Employee may hold board/officer positions and titles within the company itself and/or its subsidiaries.

EXECUTIVE TERMINATION

- Anytime a company wishes to terminate a key executive of the company -Legal counsel review is imperative to assess:

- the circumstances surrounding the termination, - the ties of the executive has to the company, - its business and its assets

FOR MORE INFORMATION

Please contact:

Arlene O’NeillPartnerGardiner Roberts LLPaoneill@gardiner-roberts.comTel: 416.865.6640