The Top 12 Employment Contract Terms
Published:
February 1, 2016
Author(s):
We updated this publication on April 13, 2023.
A well drafted and properly implemented written employment contract can be instrumental to both avoiding or resolving disputes both during the employment relationship and when it ends – saving the employer time and money in either case.
Written Employment Contracts
Every employer has an employment contract with every employee – even when there’s “nothing in writing”. The issue is often, however, ascertaining its terms. There are several benefits to a well-drafted and implemented written employment contract, the ultimate benefit being fewer disputes and a reduction in the associated time and cost to the employer.
Clarity. A well-drafted written employment contract that sets out all of the terms and does so clearly will help avoid disputes later. And since employment relationships are often intended to last a long time, and human memories are fallible, a written employment contract ensures all of the details and sometimes complicated arrangements are recorded.
Legislative Compliance. The employment standards legislation of some provinces requires a written document; for example, the N.L. Labour Standards Act requires an “employment statement” setting out terms and conditions of employment required by statute. Furthermore, while it’s not permissible to contract out of all requirements of employment-related legislation, it is possible to contract out of some; a written contract makes it far simpler to prove the employer did so.
“Legalese”. Unlike other “commercial” contracts, courts interpret employment contracts to protect employees. So, they scrutinize employment contract terms closely, usually deciding any ambiguities against the employer’s interest. There are technicalities associated with many employment contract terms, and it’s important to get the “legalese” and wording right so they will meet the legal tests for a court to enforce them. Properly implementing the employment contract is just as important as getting the terms right. The employment terms must be set at the time of hiring/start of employment: an employer can’t unilaterally impose new employment conditions that fundamentally change the employment relationship during the employment unless it gives the employee appropriate notice or “consideration”: something new of value in exchange for the obligations in the contract. The 2023 decision in Dornan v. New Brunswick (Health) offers employers a vivid illustration of what happens – and the costs – when employers get this timing wrong.
Top 12 Employment Contract Terms
A standard form employment agreement is useful, but the employer should always review it and, if required, customize it to the circumstances. That said, there are some terms that just about every employment contract should include. Here are the top 12.
1. Termination Clause. The COVID-19 pandemic illustrated the value of including a termination clause in an employment contract, as COVID-19 shut businesses down, employers were forced to terminate employees’ employment – and some courts decided COVID-19’s economic impact extended the length of reasonable notice to which employees were entitled. A “termination clause” is intended to displace an employee’s entitlement to “reasonable notice” upon termination of their employment without cause by specifically setting out the employee’s notice entitlement. The law generally presumes that an employer can terminate a contract of “indefinite duration” (as opposed to one for a fixed period) without cause by giving the employee “reasonable notice” (although the employment standards legislation of some provinces requires cause for termination of employees with more than a specified length of service; for example, under the N.S. Labour Standards Code, an employer can only terminate an employee with 10 or more years in specific situations). But the meaning of “reasonable notice” is uncertain because it’s individually assessed at time of termination. A number of factors are used to assess the reasonableness of notice, including the nature of the position, length of service, age, ability to find comparable employment and circumstances surrounding the hiring. Employers can rebut the “reasonable notice” presumption with an enforceable termination clause. But it’s a difficult task. Courts interpret termination clauses very strictly, and in employees’ favour. To be enforceable, a termination clause must use clear, unambiguous language expressly specifying some other period of notice, and fully comply with employment standards legislation – made even more difficult by the Ontario Court of Appeal’s June 2020 decision in Waksdale v. Swegon North America Inc. This decision effectively voided termination clauses in most Ontario employment contracts, and caused significant concern for employers in other jurisdictions, particularly those in which the statutory termination notice exception is substantially similar to that in Ontario, including Nova Scotia and Newfoundland and Labrador. Despite these challenges, including an enforceable termination clause gives both the employer and the employee greater certainty about the notice period in the event of a “without cause” termination.
2. Temporary Layoff Clause. As a general rule, laying off an employee without the contractual right to do so amounts to a constructive dismissal: a breach of a fundamental term of the employee’s employment allowing the employee to treat their employment as terminated without cause, and to claim the same entitlements as if the employer had expressly dismissed them (statutory notice or pay in lieu of notice, reasonable notice, severance where applicable, or reinstatement in a unionized context). The COVID-19 pandemic similarly illustrated the value of a temporary layoff clause in an employment contract. While many employees accepted temporary lay-offs during COVID-19 even in the absence of a contractual clause, believing it to be the best alternative in the circumstances and hoping to be recalled, not all did so. And courts have decided that those employees were constructively dismissed, and found the employers liable for notice. Including a temporary lay-off clause in an employment contract gives employers some protection in the event that unforeseen circumstances, like a recession or even another pandemic, results in business slowdown or even temporary closure. However, ensure the clause complies with the applicable employment standards legislation; each province or territory has different rules for layoffs including if or when they are permitted and for how long. And be aware that practically, including a temporary lay-off clause in an employment contract could make it more difficult for an employer to hire new employees.
3. Obsolescence Clause. An “obsolescence clause” is intended to ensure the employment agreement will remain applicable and enforceable no matter how long it lasts, and even if the employment relationship fundamentally changes between the date the contract is signed and the date the employment relationship ends.
4. Severability & Interpretation Clauses. One of those “legalese” clauses that can save the day, it states that any legally unenforceable terms of the contract are severed from the contract without affecting the enforceability of any of the other contract terms. For example, it could operate to sever an unenforceable probationary clause – and leave an otherwise enforceable termination clause standing. However, it’s important to be aware that a severability to clause won’t necessarily save a “without cause” termination clause if the “for cause” termination clause isn’t enforceable: courts have interpreted even separate employment contract terms dealing with termination with cause, and termination without cause, to be a single clause. For this reason, it’s helpful to also include an interpretation clause (sometimes called a “fail-safe”, “saving”, or “minimum entitlements” provision) that states that the terms of the contract should be read consistently with the applicable employment standards legislation such that the employer will, in all instances, provide the employee with their minimum statutory entitlements.
5. Non-Solicitation &/or Non-Competition. Employers are exposed to financial loss when an ex-employee solicits her former employer’s customers and/or employees. Employers can often protect their interests by imposing post-employment obligations on employees limiting their ability to compete and/or to solicit customers and former employees. But public policy discourages such restraint of trade generally, and such obligations can affect the employee’s ability to earn a livelihood. So, courts closely scrutinize them and refuse to enforce them unless the employer can prove they protect a legitimate proprietary interest of the employer, and are reasonable in terms of duration, geographic scope and the nature of the activities prohibited. Non-competition clauses, in particular, are notoriously difficult to enforce. And recently, Ontario amended its employment standards legislation by adding Part XV.1 to prohibit non-competition clauses except in very limited circumstances. The key is to use clear and unambiguous language and not to ask for more than is really necessary to protect the employer’s interests. Non-solicitation clauses are less restrictive of employees’ ability to earn a living, often sufficient to protect the employer’s interests, and, provided they’re reasonable, generally easier to enforce.
6. Probationary Period. Including a period of probation to determine whether the candidate is suitable for employment can be of value to the employer. A probationary clause states the employer can terminate the employee’s employment during a specified probationary period without notice or cause – but to be enforceable, the clause must comply with the minimum notice period required under the applicable employment standards legislation.
7. Protection of Intellectual Property, Confidentiality & Non-Disclosure. Intellectual property (IP) and confidential information, like market research, financials and customer information, can be an employer’s biggest asset. The employment agreement should protect them and require the employee to keep them confidential. Address who owns any IP the employee develops and define what it covers and what is confidential; require the employee to acknowledge how they will or did gain it and continue the obligation post termination.
8. Fixed-Term. Fixed-term contracts can be risky for employers, as the 2023 decision in Dornan v. New Brunswick (Health) aptly demonstrates. If there’s no termination clause, an employer that terminates a fixed-term contract before the end of the term is liable to pay the employee for the balance of the term. And there’s more: in some provinces and territories courts and tribunals have decided the employee’s typical duty to mitigate their damages doesn’t apply in the case of a fixed-term contract. So, while there are a limited number of circumstances where a fixed-term contract makes sense, carefully consider whether it or an indefinite term employment contract is best in the circumstances. If you do decide to use a fixed-term, make that clear and include a termination clause specifying the notice to which the employee is entitled upon early termination of the contract –or risk paying the remaining balance of the term.
9. Permitted / Prohibited Activities. The proliferation of “work from home” arrangements has led to another recent trend: “overemployment”, where employees work for multiple different employers, at the same time, and without the knowledge of any of the employers. An employer does not automatically have cause to terminate a “moonlighting” employee without notice or pay-in-lieu of notice. Make it clear whether the employee is permitted to undertake other activities – for pay, or without pay (such as charitable work) – during her employment, or whether she must devote all of the time to the job, and other activities (or certain ones) are either completely off-limits or require the employer’s (ideally written) consent ahead of time. Similarly, employees sometimes assume that “work from home” implies permission to “work from anywhere” – including from another province or territory. However, typically, the employer must comply with the employment-related laws (including employment standards and occupational health and safety) of the province or territory in which the employee is located. So, consider whether to include a term requiring the employee to work in a specified province or territory, and confirm that this is a fundamental term of the employment. Also require that an employee obtain the employer’s approval (and if approved, that they sign a revised employment contract) if they wish to permanently move to and work from another province or territory.
10. Entire Agreement Clause. Another “legalese” clause that can make a difference in a dispute, this clause states that the written agreement is the complete agreement, and supersedes any prior agreements – oral or written, drafts or final – the employer and employee might previously have made about the contract’s subject. The intent is to prevent either from claiming there are other contract terms in addition to those in the written contract.
11. Independent Legal Advice. While independent legal advice isn’t required, it can help the employer enforce the employment contract. For example, in the 2023 decision in Dornan v. New Brunswick (Health), the employer’s failure to encourage the employee to obtain independent legal advice before signing the written employment contract was one factor relevant to deciding whether the employment contract – and the termination clause in it – was enforceable. Include a clause in which the employee acknowledges she had the opportunity to seek independent legal advice on the contract. And be sure to actually give the employee time to consider the contract and to get that legal advice before signing.
12. Resignation Notice Clause. Employers often require senior executives to give notice of resignation to deal with difficulty in recruiting or replacing a specialized skills position and to ensure a smooth transition. The resignation notice is often considered a moral obligation, and most employers do not act on such a clause – but it is enforceable.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Labour & Employment Law Team to discuss how we can help you review and revise your employment contracts or draft a new one.
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