January 21, 2021
Well-drafted, properly implemented written employment contracts are a key tool to avoiding or resolving disputes during and at the end of employment relationships, ultimately saving the employer time and money. But the law respecting employment contracts, like all areas of the law, evolves. Prudent employers will regularly review and revise their standard form employment contracts to ensure they’re keeping pace with legal developments. And that’s particularly important in 2021, as COVID-19 pandemic-related wrongful dismissal cases will make their way before Canadian courts, putting employment contracts to judicial scrutiny – and employers to liability exposure.
Here are five of the key legal developments in 2020 for employers to watch for in their annual employment contract review and, if warranted, revision. But remember: it’s easy to change employment contracts now for employees you hire in the future; you must take care making changes to employment contracts of existing employees. Unilaterally changing a fundamental employment term or condition without giving the employee “consideration” (something of new value in exchange) or sufficient advance notice can make these new contracts unenforceable or might amount to constructive dismissal, entitling the employee to treat the contract as at an end on the basis the employer indicated it no longer intended to be bound by its terms.
1. Temporary Layoff Clauses: A Permanent Addition
In unionized workplaces, collective agreements typically give the employer the contractual right to temporarily lay off employees, and provide a mechanism to determine who goes when, such as seniority. In a non-unionized workplace, however, employment contracts don’t’ typically deal with the employer’s right to temporarily lay an employee off. And an employer doesn’t automatically have the right; they must have a contractual right to do so, or it amounts to constructive dismissal. Despite this, the COVID-19 pandemic forced numerous employers in Canada (and globally) to temporarily close their businesses – and to temporarily lay some, or even all, their employees off. It’s unclear whether in the pandemic circumstances, courts will agree that doing so indicated the employer’s intention to no longer be bound by the employment contract, and thus whether a temporary lay-off amounted to a constructive dismissal. But there was, and still is, a great deal of uncertainty on the parts of both employers and employees around the legal implications of implementing temporary lay-offs. Practically, many employees accepted the temporary layoff given they expected to return to work eventually – and that there were very limited job prospects otherwise. The inclusion of a temporary layoff clause in the employment contract gives everyone more certainty.
The Lesson Learned. Include in every employment contract a clause giving the employer the express right to temporarily lay the employee off, and address:
2. Force Majeure Clauses: May the Force be in Your Employment Contract
Commercial contracts commonly include “Force Majeure” clauses. A party can rely on a Force Majeure clause when performance of contractual obligations is interrupted because of an unforeseeable event that’s beyond the control of any contracting party. In the context of the COVID-19 pandemic context, a Force Majeure clause could, depending on its specific wording and compliance with applicable employment standards legislation, allow for suspension, delay or termination of contractual obligations for the duration of pandemic. Employment contracts, however, often don’t include a Force Majeure clause. As a result, employers seeking to take the position the pandemic automatically ended an employment contract without the fault – or liability – of either the employer or the employee can only rely on the argument the contract was “frustrated”: ended by a supervening event that resulted in a fundamental change in circumstances making further performance of the contract either impossible or so radically different from what the parties intended that the contract can be said to no longer exist or be binding. But relying on the concept of frustration is risky and uncertain because the legal standard to meet is high. The inclusion of a Force Majeure clause in the employment contract, while still open to a court’s interpretation of its application in a particular situation, at least provides the employer with the opportunity to make the argument it should apply.
The Lesson Learned. Include a Force Majeure clause in every employment contract, and address:
3. Termination Clauses: Cause for Concern
Termination clauses, particularly “without cause” termination clauses, are one of the most important clauses to include in any employment contract. But the Ontario Court of Appeal’s June 2020 decision in Waksdale v. Swegon North America Inc. has caused employers across the country significant concern about their enforceability. The crux of the issue is the difference between the standard for “just cause” under the common law, and the standard for a termination without notice set out in employment standards legislation. In Waksdale, the employer admitted the contractual “for cause” termination clause violated Ontario’s employment standards legislation because it referred only to the common law standard of “cause”, and didn’t meet the legislative standard set for termination without notice. The employer argued this, however, had no effect on the “without cause” termination clause, because the clauses were “distinct” and the contract included a severability clause. But the Court of Appeal, in a significant departure from prior lower court decisions, decided the termination provisions of an employment contract must all be read together, and an invalidity in one clause renders all of the contractual termination provisions unenforceable.
In one fell swoop, the decision effectively voided termination clauses in most Ontario employment contracts. On January 14, 2021, the Supreme Court of Canada dismissed the employer’s application to appeal the decision. The decision therefore stands and sets a new precedent in Ontario. And while courts outside of Ontario aren’t required to follow it, it holds significant sway across the country. This makes the Waksdale decision cause for concern for employers in other jurisdictions in which the statutory termination notice exception is substantially similar to that in Ontario, including Nova Scotia and Newfoundland and Labrador. The door is open to demands and actions for common law reasonable notice of termination (or damages in lieu) based on alleged defects in the “for cause” provisions of employment contracts – even where the employer relies on a properly drafted “without cause” termination provision. If those courts adopt the decision, it could render most termination clauses currently in use in those provinces void, as in Ontario, resulting in significant employer liability.
The Lesson Learned. In light of the Waksdale decision, it’s prudent for every employer, especially those in N.S., N.L., and other provinces in which the wording of minimum employment standards legislation is substantially similar to that of Ontario, to review and revise their employment contracts to ensure:
4. One-Sided (Online) Contract Terms: Standard Form Standards
The COVID-19 pandemic accelerated two already existing trends: the gig economy and online contracting. The Supreme Court of Canada’s 2020 decision in Uber Technologies Inc. v. Heller impacts both – and paved the way for a sizeable class-action lawsuit against Uber, challenging the classification of Uber drivers as independent contractors rather than employees, to proceed.
Mr. Heller, an Uber Eats driver, started a class action against Uber alleging Uber Eats drivers are employees rather than independent contractors, and Uber violated their entitlements under Ontario’s minimum employment standards law. To become an Uber Eats driver, Mr. Heller had to accept, online and without negotiation, Uber’s standard form contract. That contract included an Arbitration Clause requiring drivers to resolve any dispute with Uber through mediation and arbitration in the Netherlands, a process that entails up-front administrative and filing fees of $14,500 (USD), costs the contract didn’t specify. Uber tried to block the class action lawsuit by arguing the Arbitration Clause required Mr. Heller take the dispute to arbitration in the Netherlands. But the Supreme Court of Canada decided the Arbitration Clause was unenforceable because it was “unconscionable”: there was an inequality of bargaining power between the parties, and the Clause was sufficiently one-sided at the time of contracting that the bargain was unreasonably unfair. For context, it would have cost Mr. Heller more than a year’s earnings to pursue arbitration. The Court concluded the Arbitration Clause effectively made it impossible for Mr. Heller to arbitrate the dispute with Uber, essentially depriving him of any remedy under the contract.
The Court did caution that a standard form contract doesn’t, by itself, create an inequality of bargaining power or unconscionability, noting they are often necessary and useful. However, they are more susceptible to challenge because they can impair a party’s ability to protect their interests in the contracting process since one party drafts the contract and might include terms that are difficult to understand or buried in excessively long contracts. In particular, clauses that can deprive a party of a legal remedy, such as choice of law, forum selection and arbitration clauses, in standard form contracts are prone to be found unconscionable.
The Lesson Learned. Carefully consider the clauses in your employment and contractor contracts, especially those affecting legal remedies, whether an arbitration clause or otherwise, and particularly if using an online standard form contract. Some best practices are as follows:
5. Bonus & Incentive Pay Clauses: Life After Termination
Employers frequently use incentive, bonus and stock option plans to attract and keep employees. But the 2020 decision of the Supreme Court of Canada in Matthews v. Ocean Nutrition Canada Ltd. means the their liability for a payment under that plan could live on – even after an employee’s employment ends. The Court reconfirmed the employment contract effectively “remains alive” for the purpose of assessing a dismissed employee’s damages during their common law reasonable notice period. It awarded a former employee over $1M under a contractual bonus incentive plan that was triggered after his “active” employment ceased, but during his reasonable notice period – despite extensive and commonly used plan wording purporting to limit entitlement to active employees.
The Lesson Learned. Review the wording of bonus, incentive, and other benefit plans and employment contract termination provisions, and revise them if necessary, to ensure:
Please contact your McInnes Cooper lawyer or any member of our Labour & Employment Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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