Having written contracts provides greater certainty and reliability for both the employer and employee over the terms of employment. Creating the written contract (and potentially negotiating its terms with the employee) is also an opportunity for the employer to include obligations that will facilitate its effective management of the workplace and protect its interests in the various challenging situations that can arise within employment relationships.
There are numerous well-established contractual strategies for protecting a business’s interests, including:
- termination clauses
- probationary periods
- restrictive covenants
- intellectual property clauses
- reserving the right to make changes
- obsolescence clauses
- requiring mimimum notice of resignation
Contract vs common law
As soon as a company employs a worker, a contract for the terms of the relationship exists. If the terms are not set down in a written contract, then they will be implied from the circumstances and the common law. When a company leaves it to the common law to set the terms of the working relationship, it has less control over those terms and less clarity about what they are than if it were to thoughtfully choose terms and sent them down in writing.
Termination clause
One of the most common and financially significant sources of liability for employers arises in the termination of employment relationships. A well-drafted termination clause can mitigate the risks.
At common law, employees are entitled to reasonable advanced notice of termination, which is an implied term of the contract. Determining the duration of the notice period for an individual employee is challenging and generally an exercise of estimation. Numerous courts have noted the process is more art than science; there is no set formula. The result is unpredictability.
Moreover, the potential lengths of notice can be quite long, capping out at approximately two years. This degree of unpredictable liability can take employers by surprise.
To avoid surprises, employers can displace the common law by using a termination clause that explicitly provides for an alternative obligation to provide notice of termination or pay in lieu. Parties have wide latitude to deviate from the default of common law reasonable notice, provided the termination clause meets the minimum requirements of the relevant employment standards legislation.
When hiring a worker under a fixed term contract, it is especially important to include an early termination clause. Without one, the employer could be liable to pay the worker out for the remainder of the term.
Probationary periods
Making the right hiring decisions is difficult. Instituting a probationary period can give the employer a period in which to assess a new employee’s suitability for the position, and a low-consequence way to end the relationship if things aren’t working out early on.
Most commonly, a probationary clause would state that the employer may dismiss the employee without notice or cause during a limited period at the start of the relationship. That probationary period must comply with employment standards legislation. For example, in Alberta, employees are entitled to Code notice if they’ve been employed for at least 90 days. A probationary clause that disentitled the employee to notice for longer than 90 days would violate the Employment Standards Code and may be unenforceable, leaving the employer potentially liable for compensation in lieu of common law notice.
Restrictive covenants
Restrictive covenants can protect a business from unfair competition from former employees and the misuse or unfair use of its resources.
Employers entrust their employees with important information and resources, such as trade secrets, intellectual property, customer information, and client contacts and relationships. That can make an employer vulnerable to harm, particularly when employees leave to work for competitors or set up their own businesses.
Restrictive covenants constrain what employees can do during and after their tenure. They can be effective mechanisms to protect proprietary interests.
- A non-competition clause can prevent a worker from setting up a competing business with a competitive advantage derived from the connections or resources gained in their prior employment.
- A non-solicitation clause can protect a business from losing customers, employees, and other business connections to the enticements of a former employee.
- A confidentiality agreement can place constraints over how employees use the company’s information and intellectual property after the termination of employment.
Restrictive covenants are notoriously tricky to draft; if unreasonable, they will generally be unenforceable.
Note, however, restrictive covenants are not always appropriate. It is bad practice to, for example, include a non-competition clause in the contracts for all employees as a matter of course, without regard for the type of position.
Retention or Assignment of intellectual property rights
Many businesses derive value from inventions, creative works, and the development of new technologies. Explicit terms in the contract can clarify who will retain the rights to intellectual property that employees create during their tenures.
Property rights can relate to copyright (including so-called moral rights), patents and trademarks (among other things). The common law and regulations create presumptions around who owns intellectual property, which include different rights for employees and contractors, and are quite context dependent. Many of the presumptive rules can be displaced by agreement. Explicitly stating in the contract what rights the parties have over intellectual property can prevent unnecessary disputes later.
Build in flexibility [reserve the right to make changes]
Employers occasionally want to amend their employee’s contracts after the contract has already been formed. But this can expose an employer to a claim for constructive dismissal. Explicit terms giving the employer a right to make certain changes can mitigate the risk of a constructive dismissal.
A constructive dismissal occurs when the employer makes a unilateral and substantial change to the terms of employment that represents a repudiation of the existing contract. Yet the employer does have some leeway to make changes to the terms of employment, pursuant to its right and obligation to manage the workplace. Employers can expand the scope of their discretion to make unilateral changes to employment contracts by including terms that specifically provide for such latitude.
For example, a change to a salesperson’s commission plan that would have resulted in a constructive dismissal could be rendered permissible by a term explicitly granting the employer the rights to change the employee’s compensation at any time.
Avoid obsolescence
Employers can ensure important clauses in their contracts remain enforceable despite changes to an employee’s position over time by using an obsolescence clause.
The passage of time and changes to an employee’s role with a company can create an implication that some terms from the original contract are no longer applicable. For example, an employee might be hired as a labourer, and later promoted to supervisor, then floor manager, then operations manager, over the course of a number of years. In that situation, courts could hold that the “stratum” or foundation of the original contract to employ the individual as a labourer no longer exists. If so, then important clauses limiting the employer’s liability, such as a termination clause, may not be enforceable.
An obsolescence clause could state that certain provisions of a contract will not be rendered obsolete by the passage of time or changes to the employee’s role.
Minimum notice of resignation
Losing a key employee on short notice can leave a business scrambling and potentially cause financial damage. The Alberta Employment Standards Code provides that employees who have worked for more than 90 days must give one week’s notice of resignation, and if they been employed for two years or more they must give two week’s notice. That may not be enough time to find an adequate replacement for a key worker, particularly if the resignation were to happen at an inopportune moment for the business.
An employer can reduce the risk of that situation arising by explicitly providing for greater period of notice of resignation in the contract.