It’s Time to Revisit Your Employment Contracts

If you have employees in your business, then by default you have employment contracts. Every employee in Ontario is by default under some form of employment contract. The key difference is that many of those employment contracts are simply not written down. 

So what does that mean?

If a teenager begins working stocking shelves at your store, for example, you as the owner have likely told them what you expect from them, including when you expect them to come into work, what you expect them to do, and how much you’ll pay them for your time. Those key points form the basis for their employment contract, even if nothing is ever formally on paper or email.

However, that’s not the entirety of the contract, and that lack of paper can leave your business exposed for significant liability in certain situations. So what does an employment contract do, and why is it important to update them routinely? How can employment contracts help employees while also protecting your business?

What makes up an employment contract?

We tend to think of employment contracts exclusively as written documents, but if you hire someone on a verbal or a handshake agreement then there is still an implied employment contract in place. As mentioned, any terms you discuss form part of the basis of that contract, but not all of it. So what else is included?

The majority of the contract will be made up of the Employment Standards Act, 2000 (the “ESA”). The ESA is the governing law in Ontario for private, non-unionized employees who are not governed by federal laws (nation-wide industries such as aviation, telecommunications, banking etc.) or who are not under a unionized collective bargaining agreement. 

The ESA spells out some of the terms of work that we would think of most commonly, such as maximum hours of work per week, overtime pay, vacation pay, and leaves such as pregnancy leave or various emergency medical leaves. This is the law that governs the majority of employees in Ontario, and it lays the foundation for minimum standards of work for employees. A written employment contract between an employer and an employee can exceed what’s outlined in the ESA, but it cannot go below the ESA’s minimum standards.

While the ESA sets out the ground rules for most parts of an employment contract, and creates a default contract if none exist, there’s one key part of the law where an unwritten contract is defined not by the ESA, but by thousands of legal cases over the course of the last century, and it’s an exclusion that can cost employers a pretty penny.

Those pesky termination clauses

Even though the ESA has rules about what employees are owed if their employment is terminated, the law states that employees are not locked into those small amounts by default. In other words, an employee with 6 years of service is not owed a maximum of 6 weeks’ pay in lieu of notice because that’s what is written in the ESA.

Instead, the default setting in the law is what is known as ‘common law,’ or judge-made law, which is based on thousands of previous legal cases. This is an estimation of how long it might take that employee who has been terminated without notice to reasonably find new work based on their age, their years with the company, the nature of the work they were doing, and the current job market. 

If this sounds confusing, that’s because it certainly can be. The power of a written employment contract is that it can limit an employee’s entitlements in these situations, and confirm that they receive something below common law notice, so long as it is equal to or (usually slightly) above the minimum notice outlined under the ESA. However, the law is finicky on these clauses and the rules change frequently, which is one of the core reasons to keep a keen eye on your employment contracts and work frequently with an employment lawyer.

What else can go into an employment contract?

Beyond the basic terms about wages and termination pay, a written employment contract holds potential to include so much more. When it comes to wages, for example, an employee’s compensation may be beyond a simple dollar amount. Depending on the setup, it can readily include bonuses, commissions, a vehicle allowance, cell phone payments, or any other sort of structure – all of which can be outlined in the contract. 

The contract is also the perfect location for a proper job description, which gives both employers and employees a clearer expectation of the role. A job description should never be assumed, and the absence of one can only lead to employers blaming employees for things that they did not know were expected of them. A proper job description provides clarity, and sets expectations for the employee even before they accept a role.

Lastly, the contract itself does not need to be the only part of a larger employment contract. Any policies or handbooks which further outline employee conduct can also be included in the greater employment contract, and referenced everywhere as forming part of the contract. Remember, employees should be allowed to review such handbooks before agreeing to accept a role. 

How often should employment contracts be updated?

Because the law on employment contracts changes frequently, specifically the rules about termination clauses and acceptable language, it is crucial to at the very least review your employment contracts annually with an employment lawyer. While a worker and their role might not change from year to year, the world around them does, and those contracts need to be up-to-date in order to best protect your business. 

Even if a contract was current at the time that it was signed, it may not be effective 10 years later when you need to let that employee go without cause. You may think that you only owe that employee 8 weeks’ pay in lieu of notice, but changes in the law can leave you on the hook for 8 months’ salary or even more. 

Thankfully we can help. We regularly counsel employers to help support their best interests through properly-drafted contracts and policies, regular reviews, and discussing potential issues before they arise instead of reacting after the fact. Need us on your team? Contact our office today to set up a free, no-obligation consultation.