July 12, 2023

The Dangers Of Hiring Without A Contract: John’s Story

Let’s start with a story.

John came to work for your company just out of high school. You quickly saw potential, so after a few months you moved him from the mail room into a sales training program, then into a sales role where he had flourished for decades. After nearly 40 years, John has consistently been one of your best-performing salespeople.

Yet even John’s moxie isn’t enough to keep the company going, and you’ve made the difficult decision to close the business after struggling to find a buyer. This means that you’ll have to let go of the few remaining employees – most of the longstanding ones have retired already, and the few remaining office staff have not been with you long so their exit packages should be relatively painless.

John is another story.

Initially when you notify him of the decision he’s fairly calm, and you tell him that you’ll be sending him something via email shortly. You run a few numbers, and send John some terms that, in your view, fairly reflect his years of service and all of the hard work that he put into building the company.

John says that he’ll think about your offer. The next day though his mood turns as if somebody flips a switch. He comes back by email telling you that he expects something significantly higher, or else you’ll be hearing from his lawyer. You try to take a meeting with John, but he tells you that he won’t speak about this until you come back with a higher offer. In a panic, you phone your lawyer, only to learn that…

John is in the right, and a mistake you made early on opens your business to significant risk. If he were to pursue a claim of wrongful termination, you could owe him a whole lot of money. 

Here’s why:

What The Law Says

When it comes to terminating an employee, there’s a common mistaken belief amongst employers that the Employment Standards Act, 2000 (the “Act”) spells out the law in Ontario. This is only partially true. The termination obligations in the Act sets out a floor for what employees are owed, not a ceiling. In other words, an employee’s termination pay is not automatically restricted by the Act – in fact, just the opposite. 

For long-term employees, if a contract does not expressly limit an employee’s entitlements upon termination (and the wording is not in-step with the latest legal standards), then employers may end up owing terminated employees far more than the amounts outlined in the Act. The law states that while employees who are let go are responsible for looking for work, employers are legally responsible for ‘keeping them whole’ until they are able to earn a replacement income. 

So what does this mean for someone like John?

Long-Term Employee Exit Packages

In this particular case, the major mistake was that John had no written employment contract. This is not uncommon for employees that have worked their way up in a small business, especially for those who have started in a lower-skilled role that usually may not warrant a written contract and then subsequently worked their way up in their careers. 

The lack of a written contract means that there is nothing that legally binds you as the employer to only pay John his minimum notice under the Act. That contract needs to be clearly written on paper and kept up-to-date to meet the changing legal standards of the law. Instead, you are eligible for paying John what is known as ‘reasonable notice,’ or compensating him fully until the time it takes for him to reasonably find a comparable new job.

There is no precise scientific formula to calculate an employee’s reasonable notice. This is an amount based on previous legal cases that assesses the employee’s circumstances – their age at the time of termination, their years of service, the nature of the work that they were doing, and the economic conditions that they’ll be facing in their job search. By these standards, an older, long-service employee with highly specialized skills will earn more than a younger person in a common role with their full career ahead of them.

In John’s case, those circumstances are not likely to play in your favour. He is almost 60 years old, with no post-secondary education and only one employer on his resume. He’s been in your business exclusively for almost 4 decades, which means that he has no additional skills or experience or other work environments beyond selling in your niche sphere. Practically speaking, the job market is not often kind to older employees looking for a fresh start. 

Cases may vary given specific circumstances, but hypothetically speaking you might be liable to pay John at least 24 months’ salary (or perhaps even a few more) along with his total compensation during that time, including commissions and bonuses he might have earned had he still been employed during that time. 

The Upshot

John’s story is hypothetical, but it’s one that we encounter regularly, especially with SMEs. Large corporations may have set policies regarding their employment contracts, but in small businesses hiring is often done on an as-needed basis, and paperwork is often considered an afterthought at best.

It’s that paperwork that can save you a ton of cash. Had John been on an employment contract for his current role, and had you worked with a lawyer periodically to review, it may have limited John to his minimum entitlements under the Act (or something slightly above that, depending on the contract). The right wording could have meant the difference between paying out 2 months’ compensation, or 2+ years’. 

It is crucial to work with an employment lawyer who is up-to-date on the latest legal standards. Courts are often imposing new requirements on employment contracts, and one that was written 10 or 20 years ago that has not been updated may be invalid today, even if it was fine then. Lawyers follow the court decisions carefully and can help ensure that you are compliant at the time that you need to do that termination.

If you are in a situation where you need to terminate the employment of someone who does not have an enforceable contract, we can help minimize the cost, particularly if you contact us before the termination happens. Yes, it can be done, though you will likely have to pay more than what you anticipated.  

We routinely assist employers of all sizes through terminations and exit packages, and we help with that added prevention to help avoid a case like John’s. Contact our office today to set up a consultation.