Employment contracts must be ‘tailored’ to the workplace

By Tony Poland, LegalMatters Staff • There is no “one-size-fits-all approach” to drafting employment agreements, which is why employers should seek legal advice to ensure they are complying with the law while protecting their interests, says Ontario employment lawyer Nadia Zaman.

“You need a contract that is customized to not only the employee’s role and compensation but to all details with respect to their employment,” says Zaman, senior associate with Rudner Law. “It must also be tailored to the nature of the workplace itself.”

She says the fallout from the pandemic has led to conflicting court judgments as well as changes in legislation, resulting in a “wild ride for employers from small businesses to big corporations.”

More than ever, Zaman says, companies need to ensure their agreements address the challenges of a rapidly changing employment reality. 

It is not uncommon for employers to have outdated contracts or agreements that do not effectively address the workplace structure and that can be costly, she says, adding the need for regular reviews is often overlooked.

‘The exposure to liability can be substantial’

“There could be something wrong with your contracts. Let’s say you haven’t updated them in a few years. Now you need to rely on them,” Zaman tells LegalMattersCanada.ca. “If these agreements are not properly structured, the exposure to liability can be substantial when it comes to managing dismissals and entitlements. Especially if you have a large organization with hundreds of employees.”

She says it can be a mistake to downplay the importance of a well-drafted employment contract. 

“An employment agreement can be compared to automobile insurance,” Zaman explains. “You could find yourself in trouble if you drive a car without having insurance. If you are running a business in today’s day and age, it is risky if you don’t have the proper contracts and policies in place. It is the best form of insurance with respect to your legal relationship with your employees.”

Unfortunately, many employers fail to treat employment relationships like legal relationships, she says.

“We tell our clients to compare it to a landlord-tenant relationship,” says Zaman. “There is a contract that outlines the rights and responsibilities of the landlord and tenant. Can you imagine not having an agreement that sets out the terms and conditions? But when it comes to employment relationships, many employers take a different approach.

“As an employer, you want to ensure the relationship is actually formalized in a written contract,” she adds. “You want to think about the details that are important for your organization.”

Contract lays out the terms and conditions of employment

A contract allows the employer “to lay out the terms and conditions of employment and the expectations they have for their workers,” Zaman says. 

Without an employment agreement, companies leave themselves exposed to damages under common law, which can be quite expensive, she says. 

Under the Employment Standards Act, 2000 (ESA), for example, an employee making $50,000 a year who signed a legally binding contract could be limited to eight weeks of notice of termination or termination pay. That would amount to less than $8,000. 

With no employment agreement or no proper employment agreement, that same worker could be entitled to up to 24 months of pay under common law, or $100,000.

Zaman says having an enforceable contract is as important as hiring the right person. 

“Sometimes people will just download a template off the internet. There are a multitude of agreements available but I would strongly advise against using them,” she says. “Employers will often use the same agreement that they have had for years. That can also be risky.”

The business landscape has changed and internet contracts or those drafted years ago may not offer the protection a company needs, Zaman says. For instance, remote working has become more commonplace since COVID-19, she says.

Change in work conditions must be addressed

“Setting expectations around remote work is critical,” she says. “Do you want a situation where the employee is never expected to work in person? If the expectation is that in the future they might be working in person or in a hybrid work environment, you need to make sure that those terms are clearly laid out in the contract. Otherwise, there might be an allegation of constructive dismissal if you suddenly change their working conditions.” 

Before drafting an agreement, an employer must consider how their business is structured, says Zaman. 

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“There may be mostly hourly production staff along with some office staff and even fewer people in management roles,” she says. “You are going to want to have separate contract templates for the different types of employees and make sure they are actually suited for the particular roles in question.”

An organization also needs to consider whether there will be conditions of employment, Zaman says.

“You may want background or reference checks for some employees,” she says. “But you want to ensure that it is a condition of employment and it is set out in the contract that these conditions must be satisfied before the candidate can be hired.”

There may be other conditions depending on the circumstances, says Zaman. For example, is the potential candidate authorized to work in Canada and are they working remotely from another province? If so, there may be tax implications to consider, she says.

Understanding probationary periods

Many employers also include a probationary period in contracts of employment, says Zaman.

“But they don’t necessarily realize the implications of having a probationary clause in the contract,” she says. “The employer has a duty to assess the worker’s suitability for the role. You can’t fire someone during the probation period because they wear blue shirts and you don’t like blue shirts. You must show there was an exercise of discretion in good faith in assessing the suitability and that the person did not actually fulfill the requirements or isn’t suited for the role in question.”

Probation clauses are often unnecessary in Ontario, says Zaman.

“If you are looking to limit an employee’s entitlement to the bare minimum under the ESA you can terminate that person within that three-month mark for any reason,” she says. “Assuming, of course, that there is no human rights breach or other allegations of wrongful conduct.” 

While employers have become savvier because of pandemic shutdowns, what is often overlooked when drafting an agreement is a temporary layoff clause, Zaman says.

“Essentially without that clause, if an employee is temporarily laid off, even for a short period, it may be seen as a constructive dismissal of employment that would entitle that worker to notice of termination or pay in lieu,” she says.

Another forgotten clause deals with the right to suspend an employee, Zaman says.

‘Many employers think they automatically have the right to suspend’

“Many employers think they automatically have the right to suspend an employee with or without pay,” she says. “But, generally speaking, that is a right that comes through the contract so you would need to include that in the agreement. Otherwise, a worker might claim constructive dismissal after being suspended.”

Zaman says companies should also be careful not to misclassify employees as independent contractors. 

“As an employer, it is prudent to discuss the nature of an individual’s role and compensation with your employment lawyer who can help determine whether that person is an independent contractor or an employee,” she says. “If a contractor is deemed to be an employee it could also expose the employer to substantial liability upon termination.”

How an employer presents an employment contract is also important, Zaman says. One common mistake is making a verbal offer to a potential candidate and later providing a written agreement after the person starts working, she says.

However, unless the employer offers “fresh consideration” such as more pay or better benefits in exchange for signing, that written contract would typically be unenforceable, Zaman advises.

“There can be plenty of variables to consider with an employment contract,” she says. “You need extremely clear and unambiguous wording in your agreement, which is why it makes sense to seek legal advice.”

For part one of this two-part series on employment contracts, click here.