What really needs to be included?
By Patrizia Piccolo
Each time an employer considers putting pen to paper (or fingers to keyboard, as the case may be) to draft an employment contract, the potential for costly errors exists. However, if proper forethought is given to the essential terms of the contract, then mistakes can be avoided, money can be saved and heartburn can be escaped.
First things first, even before starting to draft the contact, the employer must think through the context in which the employment contract is being drafted. That is, why are you, the employer, entering into this employment agreement? Is it because you’re hiring a new employee? Is it because you need to enter into a new agreement with an existing employee? Is it because there is a sale of business that is taking place? Each of these situations requires thoughtful contemplation of different key provisions. Having said that, there are some common important contractual terms that must be included in all agreements.
Key terms for all employment contracts
All employees are hired in order to perform services for their employers in exchange for compensation. The definition of compensation (including variable compensation) is consequently one of the most important terms for all employment contracts. One would think that it is easy to simply state what an employee is going to be paid. However, complications occur when an employee’s compensation is variable and includes components like commissions and bonuses.
With regard to commission entitlements, employers should think about things like (the list is not all inclusive, but intended to get your brain its daily work out):
How much commission does an employee earn?
Is it earned on gross sales or net sales or some other revenue?
When is a commission earned? Is it earned the moment the client signs the purchase order? Or, is it earned when the employer receives payment for goods and/or services delivered?
And, what happens if an employee is terminated in the middle of a commission cycle?
Does an employee continue to receive commissions during a reasonable notice period paid in relation to a termination without just cause?
With regard to bonus entitlements, employers should think about things like:
Is the bonus discretionary or nondiscretionary?
If it’s nondiscretionary, what are the objectives to be met and how much money does the employee receive for meeting those objectives?
What happens if an employee resigns?
What happens if an employee is terminated for just cause?
What happens if an employee is terminated without just cause? In this instance, employers should also consider whether they wish to have bonus entitlements continue to accrue beyond a termination or whether the bonus entitlement should cease upon an employee being provided with a letter of termination.
Once an employer has considered what and how it wishes to pay its employees, the language in the contract must clearly reflect that intention. That is often easier said than done and may require the assistance of legal counsel.
Another key term for all employment agreements is one dealing with confidentiality, intellectual property and restrictive covenants. Employers will wish to ensure that the agreement properly defines “confidential information” in the context of its particular business. Employers will also wish to ensure that they have language that properly outlines who owns the intellectual property that is created during the term of employment. Additionally, in order to protect the business from departing employees, employers are well advised to include appropriate, narrow and enforceable restrictive covenant provisions and to not try to be overreaching in that respect.
Additionally, and perhaps most obviously, employers are well advised to include termination language in each of their employment agreements. There are essentially three ways that an employment contract can be terminated: for just cause, without just cause and by way of employee resignation. While termination clauses could be the subject of an entire article unto themselves, this article will touch upon the key issues to be addressed in relation to without just cause terminations only.
The key considerations to be had in this respect are essentially whether the employer wishes to limit termination entitlements to those set out under applicable provincial employment standards legislation, or whether the employer will be providing an entitlement that is more generous. In either case, the termination clause has the potential to be hotly litigated if it has not been properly drafted. Once again, clear and precise language is needed to ensure enforceability. If the intent is to limit to applicable Employment Standards Act minimum entitlements, then the employer must ensure that all applicable minimum entitlements are properly considered and properly reflected in the termination clause. If a more generous termination provision is included, then the formula and its integral components must be explicitly listed. Again, care needs to be taken that any termination formula does not provide for less then statutory minimum entitlements.
Finally, all employment contracts should have a severability provision which clearly stipulates that if one paragraph, subparagraph or part of the contract is found to be null and void, the rest of the contract remains in force. This can be called the “Humpty Dumpty provision” – if Humpty Dumpty takes a great fall (if your contract is challenged) you want all the kings horse and all the kings men (the lawyers, judges and any one else legally debating or presiding over the contract) to be able to put Humpty together again (not have the contract completely fall apart).
Key terms for new hires
Hiring a new employee is exciting both for the employer and the employee. However, that new relationship has some special intricacies that need to be properly dealt with in this type of employment contract. Is the employee being hired from a state of unemployment or is the employee currently engaged in employment with another organization? Employees who are leaving other employment to join the company should be required to confirm in their employment contract that they are joining the company voluntarily and without any inducement to leave their prior position. (In non-legal language, that means you want them to confirm that they wanted to come to work for your company, sought you out and weren’t promised the sun, the moon and the stars to leave their current secure job to come work for your company).
Also, there should be a “getting to know you” period – otherwise known as the probationary period. The probationary clause would stipulate that the probationary period is a time for the employer and the employee to assess suitability of longer-lasting employment and that, if the employee is terminated during the probationary period, such termination could be without cause and without notice or payment in lieu of notice except for such minimum termination, severance pay or benefit continuation as may be required by the provisions of the applicable employment standards legislation.
Also, the last thing an employer wants is to receive a threatening letter from another company alleging that the newly hired employee has breached his or her non-competition agreement by joining its organization or improperly disclosed the other company’s confidential information. So, new employees should be required to warrant that they are not breaching any restrictive covenants that they may be bound to with previous employers and that they are not to use any confidential information relating to previous employers in the context of their current employment.
Key terms for existing employees
When presenting an existing employee with a new employment contract (or even a written contract for the first time), the most important item to address is consideration. That is, what is the employer providing to the employee that the employee did not already have, in exchange for the employee agreeing to enter into this new contract? If the answer to that question is nothing, the contract will be unenforceable. The consideration need not be an extraordinarily large sum of money but it needs to be new and, from a practical perspective, sufficient enough for the employee to agree to the new terms.
Of course, the employee should also be given the opportunity to obtain independent legal advice and the contract should confirm in writing that the employee has been given that opportunity and has either received or is waiving their right to obtain independent legal advice.
Finally, if there are any terms from a previous contract that the employer wishes to import into this agreement, then the agreement should be clear to indicate which clauses are new and which clauses from the previous agreement continue to remain in force. Furthermore, if an employer is introducing a termination clause for the first time, the employer should be reasonable and not expect that an existing employee with no prior termination clause limiting their entitlements would agree to and now be bound by a termination clause that limits their entitlements to statutory minimums.
Key terms in a sale of business scenario
First and foremost, any employment contract being provided to an employee in the context of the sale of business must stipulate that the offer of employment is conditional upon completion of the sale. If the contract does not contain such a term and the sale does not go through, can you imagine the messy situation the prospective purchaser would find itself in? The prospective buyer could be saddled with many new employees and no work for them to do since the acquisition did not actually take place.
Also, employers making offers of employment in this context should be explicit about any new terms and conditions of employment so that employees can understand the difference between the job and the terms and conditions they had with the vendor versus the job and the terms and conditions that are being offered to them by the purchaser.
Lastly, unless certain statutory exemptions apply, the purchaser of a company will be required to recognize the employee’s original start date – that is, inherit their seniority – for certain purposes. An employer is not permitted to contract out of the provisions of the legislation, which mandate the continuity of employment and therefore the assumption of years of service for statutory purposes. Therefore, the employment contract should not treat the first day of employment with the purchaser as the first day of employment for all purposes.
No matter what the context, employment contracts are documents necessary to record the terms and conditions agreed upon between an employer and an employee. However, employment agreements need not be long and cumbersome, but they do need to be appropriate to the circumstance and carefully and clearly written.
Patrizia Piccolo is a partner and the employment law group head at Rubin Thomlinson, LLP.