Employment contract mistakes are leading to 'significantly higher costs in damages': lawyer
Due to some recent court decisions which have seen Ontario judges siding with employees in termination cases, employers need to be conducting audits of their employee contracts to ensure they are up to date with evolving labour laws.
“Employers may assume that saying, ‘we can let you go without pay for ‘just cause’’ – they may wrongfully assume that language is okay,” said Andy Balaura, partner at Pallett Valo in Mississauga “It used to be, but in more recent years the courts have had problems with that language and it's no longer enforceable.”
This misunderstanding of the basic law is exposing employers to “significantly higher costs in damages awards made to employees,” Balaura said.
A “monumental” wrongful dismissal decision in 2020 that found an employer’s employment contract unenforceable because the termination provision was found to violate the Employment Standards Act (ESA) continues to be upheld. The most recent example, Oz Optics Limited v. Summers, saw an Ontario appeals court uphold the precedent when it decided a 61-year-old draftsperson was owed six months of his $75,000 salary due to an unenforceable contract. He had been working at Oz Optics for under three-and-a-half years when he was terminated without cause.
Employment law errs on the side of employees
“Perhaps more than ever before, employers should appreciate that a diligent employment contract audit now will potentially result in exponential savings down the road,” Balaura wrote in a recent blog post.
In Oz vs Summers, the court judge pointed out in their decision that “Termination clauses should be interpreted in a way that encourages employers to draft agreements which comply with the ESA,” and that, “Faced with a termination clause that could be reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee.”
For this reason, employment contracts need to be water-tight, said Balaura.
“There have been a lot of court decisions on this, and it's just a good human resource practice to audit and review what you're using,” he said. “Oftentimes we find employers may cut and paste provisions from previous agreements, and they might miss a provision or two that all of a sudden can look problematic.”
Ambiguous language and too-broad terms such as unnecessarily long non-compete covenants can be enough for a judge to nullify an entire employment contract, Balaura said.
“Or more commonly, the concern may be there's no definition of customers. The employer might have a thousand customers, and the salesperson may have only dealt with 10 of them, so the court may say the covenant, the non-solicitation clause, is overly broad because the definition of customer is just too broad, and for that reason they may not enforce the clause.”
Employment contract updates leading to litigation costs
However, simply "updating" an employee's contract is insufficient, Balaura said, stating that employers can overlook the requirement to add consideration to any contractual change in the employment relationship of a current employee.
This could include an employment contract that is signed after an employee has started work.
“There's a good chance the court will say that's not enforceable, because the employee already had the job,” Balaura said. “What benefit did they get for signing the document? So timing is always really important on contracts.”
Balaura recommends using the ESA’s language as a template for employment contracts, being sure that the terms do not appear to “contract out” the employee from those terms.
“You need to be clear and say, in the event that we let you go for cause but it's not found to be willful misconduct or willful neglect of duty, you will still get your ESA minimum entitlements under the Employment Standards legislation. You can still refer to it as a term, the term still exists, but you have to be clear that you're not contracting out of the ESA, you're still giving people their entitlements.”