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Why bother with employment contracts?

Employment Contact being signed by the employee

I had a client recently ask why he would bother going through the cost and efforts of doing up an employment contract, if he was going to have to fight with ex–employees’ lawyers and pay out a package in a without cause situation anyway. Good question.

Without cause termination entitlements

It remains very difficult to meet the “just cause” termination threshold in Canada, and in the vast majority of cases, the employee will be entitled to notice or pay in lieu of notice if the employer wants to end the relationship for any reason, other than just cause. Reasons such as a decline in business or moving a division of the company off shore are not just cause, even if they may be a legitimate reason to terminate an employee’s employment.

All employees must get at least the minimum amount of notice or pay set out in the applicable employment standards legislation. If there is no written employment contract that clearly sets out the entitlements upon termination (either capping the amount to the statutory amount or providing a bit more on top of the statutory minimums), the employee will be entitled to the common law amount.

The common law amount includes the statutory amount, is typically much more than the statutory minimums, and is an unpredictable range depending on the unique factors of the individual and how similar cases have been decided in the past. The judge must look in her or his crystal ball and decide what sort of cushion this individual needs to find similar employment. It can be a highly subjective exercise, although based on caselaw precedent.

Is rolling the dice better?

Some employers prefer to roll the dice and see what sort of package they can negotiate on termination. By promising a more generous amount in the contract, they worry that they are stuck with having to pay that generous amount at termination, even if the parties have degenerated into a fairly hostile relationship.

So why bother spending resources and effort on termination provisions? Because it is usually more cost–effective to have the certainty of a known cap than to enter into extensive, heated negotiations with the employee regarding the common law amount. It enables employers to plan and to think through budgets when deciding whether to terminate an employee.

Perhaps most importantly, it can help focus the parties on a winding up process already agreed upon, rather than diverting resources and time on the emotional arguments about what that employee is worth. Courts award termination damages to cushion the employee to the next job, but most employees see the entire exercise as a commentary on whether their employer valued the loyalty, sweat and soul they gave to the organization over the years.

Rarely is it just a business decision to the employee, even if they intellectually can accept that. The raw emotion of being fired will never go away, but a contract with a valid termination clause can help lower the temperature, facilitate a faster resolution and focus the parties on agreed upon terms.

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Lisa Stam, Spring Law

Founder of Spring Law, Employment and Labour Lawyer at Spring Law
Lisa Stam is founder of Spring Law, a virtual law firm advising exclusively on workplace legal issues for employers and executives. She practices all aspects of employment, labour, privacy, and human rights law, with a particular interest in legal issues arising from technology in the workplace. Lisa’s practice includes a wide range of entrepreneurs in the tech space, as well as global companies with smaller operations in Canada. In addition to the day to day workplace issues from hiring to firing, Lisa frequently blogs and speaks on both the impact, risks and opportunities of social media and technology issues in (and out of) the workplace, as well as the novel ways in which changing expectations of privacy continues to evolve employment law. Read more here.
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