Strategic Use of Contracts

By: Stuart Rudner, Employment Lawyer and Mediator, Rudner Law

As we start to look forward, one point that has become increasingly clear during the pandemic is that employers with strategic Employment Contracts in place are in a far stronger legal position than those without. Consider these two examples that relate directly to what has happened over the past two months:

  1. Temporary Layoff Clauses and
  2. Termination Clauses

Temporary Layoff Clauses:

To the surprise of many, organizations do not automatically have the right to lay employees off temporarily.

A constructive dismissal is a unilateral and substantial change to a fundamental term of the employment relationship. The very basis of that relationship is that the employee will work, and the employer will pay them their wages for doing so. Changing that, even temporarily, is by definition a constructive dismissal.

That said, we have never been in a situation like we are now and some have suggested that it is not right to assess constructive dismissal through a pre-COVID-19 lens. That is a compelling position, and I have tremendous sympathy for the businesses that, realistically, have no choice. It is not feasible to tell a business owner that they must continue to pay all staff when their revenues have dropped by 50% or more.

The law was certainly not created to handle situations like this, but at this point, the law of constructive dismissal has not changed. It is quite possible that a court will when asked to interpret the current set of circumstances, decide that the law of constructive dismissal cannot be applied in its current state to the entirely new situation we face. However, that has not happened yet.

So how can a contract help? Very simple. When we work with clients, we routinely recommend including a temporary provision. Never did we imagine a scenario like this, but our clients are glad that we gave them the advice that we did.

With such a clause, there is no risk of a constructive dismissal finding because the organization had the right lay employees off temporarily.

Termination Clauses:

So how could termination clauses help? We have seen two scenarios lately:

  1. The organization realizes that it will never want or be able to bring some people back, so their employment must be terminated, or
  2. A temporary layoff lasts longer than permitted by employment standards legislation, at which point it becomes a deemed termination.

In either case, there will be a dismissal without cause, in which case compensation (often referred to as “severance”) is required.

There are a lot of myths and misconceptions regarding severance. To address a few common ones:

  • If you do not have a contract with a valid termination clause, the employee is entitled to “reasonable notice” of dismissal pursuant to common law;
  • Reasonable notice is not “one month per year”; the courts will consider many other factors including the employee’s age, position, nature of employment (ie. managerial, clerical, sales, etc), the availability of similar employment, and whether they were recruited from a secure position;
  • The maximum is two years of severance, or more where there are exceptional circumstances;
  • Reasonable notice includes all compensation and benefits; and
  • An enforceable termination clause can limit employees to the minimum compensation required by statute.

A year of severance, or as little as eight weeks?

To give you an example of how a termination clause can reduce severance obligations, consider a 15-year office employee in their 50s. Pursuant to common law, they are likely to receive at least a year of compensation, if not more. An enforceable termination clause could reduce that to eight weeks.

Looking Forward

The past few months have been unprecedented and devastating to many businesses. We don’t know if or when things will get back to normal, but we do know that we need to think about getting back to business. In the meantime, now is an opportune time to consider how you can be more strategic when it comes to HR.

We know that employment laws are designed to protect employees. However, there are many ways in which employers can put themselves in a stronger legal position. We routinely carry out an “HR Checkup”, in which we help our clients develop strong contracts, policies and procedures. The examples above are two of many ways in which you can reduce labour costs and increase your rights.

At the same time, consider what worked, and what didn’t, as you went through this pandemic. Assess your policies, particularly in relation to health and safety, sick days, and remote work, and fix them now while the issues are still fresh in your mind.

The bottom line is that now is a chance to be strategic with respect to HR and put yourself in a stronger position as you go forward.

To learn more about Rudner Law, check out our website and our page on how we help employers. We would be happy to speak with you and discuss how we can help. You can always reach out to us by email at info@rudnerlaw.ca or by phone at 416.864.8500 or 905.209.6999.

Next Steps:

  • Throughout the pandemic, we have encouraged everyone to stay safe and stay informed of their rights. For that reason you should, check-out our regularly maintained running blog of COVID-19 workplace issues.
  • Visit the Vaughan Chamber of Commerce COVID-19 business resources page at https://vaughanchamber.ca/covid-19-business-resources/
  • You can find frequent Employment Law updates on our social media platforms, including Twitter, LinkedIn, and FaceBook, as well as past episodes of our online show, Fire Away, and other videos on our YouTube channel.
  • Sign up to receive our Employment Law updates in your inbox.
  • If you are not doing so already follow the Vaughan Chamber on any social platform via the links below!

@VaughanChamber