Don’t Forget, You’re Here Forever (or not)
When you hire an employee in Ontario with no talk of a set end date, the presumption is that the relationship will continue more or less forever. Of course this is not by any means a practical expectation. Employers change, businesses expand or sell or close, and changing business needs may mean the natural elimination of some positions.
Similarly, while employees of previous generations may have worked for one employer their entire career, that is rarely still the case. Younger employees are often seeking out better or more lucrative opportunities, even if they simply maintain an ear to the ground. Unfortunately, sometimes an employee’s performance is not satisfactory, which can lead to the termination of their employment.
If nothing lasts forever, then what does that mean for employment contracts? Here’s a simple guide to some of the options available for employers and employees:
When you issue an incoming employee an employment contract, the end of that relationship may be the furthest thing from your mind. The end should always be a consideration if your contract includes some sort of termination clause, but even though you may include one you still look forward to a long and prosperous relationship with that employee.
These contracts are effectively for an indefinite term in that they have no set end date. If all goes well, that employee may continue working for the company until their last working day, and this was of course common in previous generations. While that sort of longevity is rare today, these contracts still suggest that there is no end to the relationship in sight.
For employers, this effectively means that if you choose to end the relationship for practically any reason, it can be considered wrongful dismissal. The employee signed that agreement presumably expecting to work with you forever, and now that they are not, you have presumably pulled the proverbial rug out from under them. As the law would have it, you have effectively shattered their dreams of working for you until they are no longer capable.
Without a well-structured termination clause, the law by default is that if you let go of an indefinite-term employee then you are obligated to provide them with reasonable notice of termination. In plain language, you’ll be required to continue paying them until they can reasonably find comparable work given their age, seniority, years of experience, and the current job market. This can be a steep obligation, with some cases involving long-serving senior employees seeing a payout of 24 months’ pay or greater.
Thankfully the simplest answer comes in the form of that termination clause. A termination clause is meant to restrict what an employee is owed on termination of their employment. An employer can elect to pay the minimum legal standards (as determined by the Employment Standards Act or Canada Labour Code), or a slightly greater amount that satisfies the employer’s obligations without breaking their bank. The requirements for these clauses changes frequently with the law though, and so employment contracts should always be drafted by or reviewed with a lawyer before the parties sign.
The alternative to having an indefinite-term contract in place is a fixed-term contract. Here, the employer says up front that the employee will only be working until a set date, whether that is 3 months, 6 months, or even a few years.
In essence, this fixed term is almost an advanced notice of the end of the contract, which can be of financial benefit to both sides. Employers are less burdened by the threat of a wrongful termination at the end of the contract, since the employee has advanced notice of (and has agreed to) a set end date. For the employee’s benefit, this allows them to plan their lives accordingly, whether they are opting to continue working short-term contracts elsewhere or perhaps may even take some time off following the contract. The choice is entirely personal.
There are two potential legal consequences which employers need to be aware of. The first is that a series of fixed-term contracts does not replace an indefinite term contract when it comes to an employee’s rights upon termination. In other words, an employer cannot hire an employee year after year on a series of one-year contracts, and then treat the employee as though they had only been employed for a year.
The second consideration is that fixed-term contracts should still contain a properly written termination clause. A fixed term contract means that an employer has no right to terminate a contract prematurely before the agreed-upon date. If they choose to do so regardless, and there is no termination clause in place, then they are legally required to pay the employee for the balance of the contract. If an employee is on a 5-year contract for example without a termination clause, and is terminated after 2, then the employer is suddenly required to pay out the balance of the remaining three years!
Employers ultimately have the decision making power when it comes to offering employees a specific opportunity, and employees can decide whether or not they wish to accept the terms. Alternatively, employers may decide that the work surrounds a single task or project, and may instead opt to hire an independent contractor, yet this is a delicate decision that should also be discussed with legal counsel before proceeding.
We work with employment contracts all day, every day. We would be happy to guide you through the benefits and drawbacks of each type of contract, and can assist in drafting agreements that are both up-to-date with the law and that are in-line with your business needs. Contact us today to set up a consultation.