The Top 12 Employment Contract Terms
Published:
February 1, 2016
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A well drafted and 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 NL 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 prior notice or “consideration”: something of new value in exchange for the obligations in the contract.
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. A “termination clause” is intended to displace an employee’s entitlement to “reasonable notice” upon termination 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, in NS 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, but it’s a difficult task. An enforceable termination clause – one that uses clear, unambiguous language expressly specifying some other period of notice and complies with employment standards legislation – gives both the employee and the employer certainty.
2. 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.
3. Severability Clause. 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. To read about an actual case in which a severability clause played a key role, read McInnes Cooper’s Legal Alert: Court Confirms Employment Contract Is Enforceable – 3 Key Lessons For Employers.
4. 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 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. 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.
5. 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 under employment standards legislation.
6. 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 she will or did gain it and continue the obligation post termination.
7. Fixed Term. If the employment contract is for a fixed term, make that clear and specify the notice to which the employee is entitled upon early termination of the contract – or risk paying the remaining balance of the term.
8. Permitted / Prohibited Activities. 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 consent ahead of time.
9. 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.
10. Remedies for Breach of Confidentiality. The normal resolution from a court is monetary compensation. Employers should include a clause specifying the employee’s liability for monetary compensation for breach of her obligations, but the contract should also state that this is insufficient, and that the employer and employee contemplated and accepted an injunction (a court order to stop doing something) and/or specific performance (a court order to do something) if the employee breached her confidentiality obligations.
11. Independent Legal Advice. 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 in order 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 Team to discuss this topic or any other legal issue.
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