Before hiring a new employee every employer is entering into a bargain for the services of the prospective worker in a relationship that can last for decades. When the contract is one of employment (as opposed to other types of service contracts) this new relationship is governed by terms that are most often unwritten. Unwritten terms have the propensity to lead to unsatisfied expectations and disputes regularly decided by the courts to the disappointment of one or both parties.

The focus of this paper is to alert solicitors and other practitioners (not regularly advising on employment matters) to some of the issues that, if addressed at the outset, may save all parties from the disappointment of the litigated result.

The common law has incorporated into each unwritten employment contract several implied terms that bind both parties. One implied term is that an employee owes a duty to serve the employer faithfully and must avoid activities incompatible with that duty. The employer may have an implied term of Agood faith and fair dealing@ when dismissing an employee. If not an implied term, this latter duty is one that may exist in addition to the law of contract. On the other hand, (except in some specific circumstances) there is no implied term that an employee may not solicit the employer=s customers or compete with the employer after the end of the employment contract.

The implied term in unwritten employment agreements is that both parties will give reasonable notice of an intention to end the contract without cause. This applies to employers and employees.

In order to bring some greater certainty in the relationship and to allow each party to protect themselves in the event of a misunderstanding, written employment contracts offer the parties an opportunity to record their intentions, limit their responsibilities, and obtain protection from other common law obligations such as requiring reasonable notice of termination of the employment agreement. These contracts have the advantage of providing additional certainty that may limit the likelihood of either party pursuing claims in the Courts.

The goal of this paper is to offer some guidance to those advising employers or employees before the employment relationship is begun. Each employment relationship may become an unfunded liability with very long term consequences when businesses fail or owners change. Employers and employees can benefit by understanding and planning for the future; careful management and use of written employment contracts is some insurance against uncertainty and disappointment.

COMMON REASONS FOR WRITTEN CONTRACTS

• limiting warranties and representations;

• outlining probationary periods;

• limiting notice periods;

• creating fixed term contracts;

• protecting proprietary information; and

• protecting against the former employee working in the same market by adopting restrictive covenants/non competition and non solicitation provisions.

I. PRE CONTRACTUAL CONSIDERATIONS

The Employment Standards Act

The Employment Standards Act of British Columbia provides that an employer must not induce, influence or persuade a person to become an employee or to work or to be available for work, by misrepresenting any one of the following:

• the availability of the position;

• the type of work;

• wages; or

• conditions of employment.

Section 8

The only time written employment contracts are required under the Act is in the case of a domestic employee who is a person employed at a private residence to provide domestic services and where the person resides at the employer=s private residence.

Section 14

Common Law

The prospective employee is protected against negligent misrepresentations inducing that employee to enter into employment. Accordingly, employers must be very careful to avoid overstating the nature of the position, flexibility of the position, duration of employment and the employee=s prospects with the employer. A commonly heard complaint from employees is that someone in the hiring process told them that this was Aa long term job@ or Aa job that they will have until retirement@ or some other statement relating to the location or the prospects of the employee within the company. Often times employees will argue that their employment contract was a fixed term contract guaranteeing them a job to age 65 or some other age. All of these claims will disappear in the face of a written agreement that clearly sets out the representations leading to the new employment relationship.

If a representation of this nature is found to be untrue and negligently made then the employer may be liable for the damages suffered by the employee who relied upon the representation.

Queen v. Cognos Inc., [1993] 1 S.C.R. 87

In Queen v. Cognos Inc. the employer was found liable to an employee for damages for misrepresentation notwithstanding a written contract limiting the employee’s notice entitlement. In that case, the employee was living in Calgary where he enjoyed a well paid managerial position. He interviewed with an Ottawa company and was told that the project in question was a major one that would be developed over a period of two years with enhancements and maintenance thereafter. He was told that the position he was interviewed for would be needed throughout the entire period and that the staff required to develop the product would double. The employer did not tell the prospective employee that there was no guaranteed funding for the project or that the position being applied for was subject to budgetary approval.

The employee signed a written employment contract which permitted the company to terminate his employment at any time without cause upon one month=s notice or payment of one month=s salary in lieu of notice, and to reassign him to another position within the company without reduction in salary upon one month=s notice. Shortly after he was advised that he was being reassigned to another position, and within 18 months his employment was terminated. In spite of the written contract allowing for termination by the employer, the employer was liable to the employee for substantial damages including:

• $50,000 for loss of income;

• $250 for the costs of obtaining new employment;

• $11,972 for the loss in the sale and purchase of his home; and

• $5,000 general damages for emotional strain.

This case illustrates the risk of staff giving information (representations) about the job which may not be accurate.

It is important that employers be clear and unambiguous in the interview process. It is equally important to record any representations or promises made about the nature of the employment including assurances or representations. The written contract of employment may contain the added protection of a standard clause. There is further protection in the regular clause “that no other representations, promises or warranties” have been made to the prospective employee.

II. WRITTEN EMPLOYMENT CONTRACTS

The written employment contract will also require a measure of ongoing attention and maintenance to ensure that the terms of the agreement remain binding on the parties throughout the term of employment.

If during the term of an employment contract the parties act in a manner inconsistent with the written document, then the parties may have defaulted to a position where the employment relationship is governed by the common law considerations between employers and employees rather than the specific terms of the written document. The Court may assume that, having departed from the terms of the contract, the parties have expressed an intention not to be bound by that written document. Therefore, once written contracts have been entered into it is important to ensure that changes to the relationship are recorded and assented to by the employee.

In creating a written employment contract, general rules of contract law apply:

• there must be certainty and a clear statement of the basic terms of the agreement;

• the agreements must comply with the rules governing contract law;

• there must be compliance with the Employment Standards Act and other rules prescribed by law.

The most common terms employers seek in written employment contracts are those:

• limiting the period of notice in the event of termination without cause;

• fixing the term of the contract;

• protecting proprietary information or goodwill.

Termination

The Employment Standards Act of British Columbia sets out the minimum provision regarding severance pay for termination. Those terms include:

• An employee terminated without cause is entitled to:

• 63(1)-an amount equal to one week=s wages after three consecutive months of employment;

• an amount equal to two weeks= wages after 12 consecutive months of employment;

• an amount equal to three weeks= wages after three consecutive years of employment together with one additional week=s wages for each additional year of employment to a maximum of eight weeks= wages.

This responsibility can be met by giving written notice of termination paralleling the same time requirements.

Section 64 of the Act provides that if the employer is terminating between 50 and 100 employees, then eight weeks= notice must be given, for 101 to 300 employees, 12 weeks= notice must be given, and for terminations of over 300 employees, 16 weeks= notice must be given.

Employers often want the flexibility to discharge members of the workforce in the face of changing needs brought about by changes in the market place or changes in the employee/employer relationship. To address these concerns, the employer is entitled to require a prospective employee to commit to a written contract which limits the amount of notice of the termination of the employment contract.

Machtinger v HOJ Industries Ltd. (1992), 91 D.L.R. (4^th) 491 (S.C.C.)

Contractual provisions limiting notice requirements must be:

• clear and unambiguous; and

Dodich v. Leisure Care Canada, The O’Keefe Company 2006 BCSC 93

• equal to or greater than the provisions in the Employment Standards Act.

Waddell v. Cintas Corp., [2001] B.C.J. No. 2619 (BCCA);

MacDonald v ADGA Systems International Ltd [1999] O.J. No. 146

• The notice period must comply with the Employment Standards minimum throughout the term of employment.

Shore v. Ladner Downs (1998), 52 B.C.L.R. (3d) 336 (B.C.C.A.)

In Waddell v. Cintas Corp., the employer was entitled to rely on the minimum notice provisions of the Act. There, the relevant clauses permitting termination were:

• A... giving the team member written notice of termination or pay in lieu thereof and severance pay, if any, in accordance with the requirements set out in the Ontario Employment Standards Act@.

• AThe parties agree hereto that the notice of termination of employment provided for in this agreement constitutes reasonable notice@

It is important to present any proposed written agreement to the employee before the commencement of the employment. If the written agreement is presented after commencement of employment, the agreement may be unenforceable as lacking any new consideration separate from the oral agreement extant when the employment began.

Watson v. Moore Corporation Ltd. [1996] B.C.J. No. 525

The Courts recognize that at the outset of the employer/employee relationship, most often there is an imbalance in the bargaining positions in favour of the employer. The Courts do not wish to prevent parties of unequal bargaining power from entering into agreements; however they will construe the agreements, wherever possible, in favour of the employee. Although not always practical, a prospective employee presented with a written agreement should be advised to obtain legal advice before signing same. Advice may be more important if a written contract is presented after commencement of employment in circumstances where the employee is offered nothing new except the continuation of his job.

The Court upheld the termination with the notice set out in the Employment Standards Act notwithstanding that it was Aan entirely inadequate@ severance package.

While it is prudent to provide for notice periods that reflect the employee=s length of service, in many companies this type of liability represents a hidden heavy financial burden that can be important at the time a company is sold or the business is transferred. In addition, onerous notice provisions impair management’s ability to change the work force to meet other market changes. Written agreements can limit these types of liabilities and increase employer flexibility.

Employers providing Long Term Disability insurance programs for employees should pay careful attention to their continuing obligations during notice periods. An employee who becomes disabled during the notice period (if the right to receive the insurance benefit terminates upon the dismissal) may look to the employer for replacement of the disability benefit for as long as the policy would have answered to the employees loss.

Egan v Alcatel Canada Inc. [2006] O.J. 34

(Ont. C.A.)

The risk exists that if terminating the employee also terminates LTD/STD coverage, the employer may be paying the benefits until the disability ends or the policy would otherwise have ceased to provide payments.

Fixed Term Contracts

In the absence of a fixed term contract, an employment contract is presumed to be of an indefinite term. Fixed term contracts limiting the term an employee works for an employer to a specified period of time are another option for limiting these risks of substantial payments in lieu of notice.

These fixed term contracts provide that the employment ends at the date set out in the fixed term contract and contemplate the end of the employment relationship at the end of the written contract. Where the employer rehires the employee under subsequent or successive fixed term contracts, there is a risk that a Court will find that the relationship is one of an indefinite term requiring reasonable notice on termination without cause. The Ontario court of Appeal has said:

It seems to me that a Court should be particularly vigilant when an employee works for several years under a series of allegedly fixed term contracts. Employers should not be able to evade the traditional protections of the ESA and the common law by resorting to the label of Afixed term contract@ when the underlying reality of the employment relationship is something quite difference, namely continuous service by the employee for many years coupled with verbal representations and conduct on the part of the employer that clearly signal an indefinite term relationship.

Ceccol v. Ontario Gymnastic Federation, [2001] O.J. No. 3488 (Ont. CA)

In that case, the employee was engaged by the same employer for 16 years. The Court found that there must be unequivocal and explicit language to establish a fixed term contract and that ambiguities will be construed against the employer=s interests. Here the employer failed to prove that the contract was unequivocal and explicitly a fixed term agreement.

At the end of the day, the employers carry the heavy burden of displacing the presumption that successive years of employment under fixed term contracts have become contracts of indefinite employment period. It will be important to remember that written fixed term contracts must not contain any ambiguity. Employers should ensure that:

• the contract contain specific start and end dates;

• the contract state clearly that no other notice of the termination of the contract will be issued to the employee;

• employment records and communications with the employee always reflect or contemplate the end date of the existing contract;

• the employee not be allowed to work beyond the end date and if there is to be a new term, that contract ought to be signed before the new term begins.

Non-Competition Clauses/Non-Solicitation Clauses/Restrictive Covenants/Protecting Proprietary Information

It is implied in every contract of employment that an employee will serve the employer honestly and faithfully. However, once the employment relationship has ended, certain information acquired during the employment may be used by the employee notwithstanding his implied duty of faithfulness. Employers have used different types of clauses to protect themselves from loss or damage suffered by a former employee=s use or misuse of such information.

It should be noted that senior employees of the employer may hold the employer=s information as fiduciaries and may be prohibited from using the information engaging in a competitive undertaking after the employment ends, independently of any contractual duties owed to the employer.

Employers often want to prohibit an employee from entering into competition with the employer after the employment has ended. Non-competition clauses are, generally speaking, seen to be in restraint of trade and unenforceable. Generally, they will be enforceable only in exceptional circumstances.

Elsley v. J.G. Collins Insurance Agencies Ltd. [1978] 2 S.C.R. 916

However, Courts have enforced non competition agreements where:

• the employer has a proprietary interest entitled to be protected;

• the prohibition covers a period of time and distance which are not excessively broad;

• the covenant is not against competition generally and preventing solicitation of clients of the former employer will not be adequate protection.

The Court will consider competing interests including the employer=s legitimate commercial interest in protecting its confidential information and business.

In contemplating a non competition clause, the question posed by some authorities is: AWill a non solicitation clause adequately protect my interests@. If it will, then the more drastic weapon of a non competition clause is at greater risk of being unenforceable. A non competition clause is more likely enforceable Awhere the nature of the employment will likely cause customers to perceive an individual employee as the personification of the company or employer.@

Friesen v. McKague, (1992) 96 D.L.R. 4^th (341)

Lyons v. Multari (2000), 50 O.R. (3d) 526

If the client’s customers are likely to perceive an employee as the true presence of the company in the marketplace, then the employer’s legitimate commercial interest will be more significantly impacted if that employee goes into competition. Then, a non-competition clause will be seen as more reasonable restraint on the employee with a greater chance of surviving a challenge. However, if a simple prohibition against an employee contacting or soliciting a customer or clients is sufficient, the employer is less likely succeed in the enforcement of a clause. It is important to conduct a practical and realistic examination of the client’s business interests when choosing between a non-competition and non-solicitation clause.

Severance

There is now a broader judicial appetite to sever the offensive provisions of non-competition agreements in appropriate circumstances.

Historically, if an agreement was unreasonably broad, the Court would not sever the offending term and enforce the balance of the agreement.

Maguire v. Northland Drug Co. Ltd [1935] SCR 412 at 416.

The B.C. Court of Appeal had accepted the proposition that a restrictive covenant clause could be severed from an agreement.

Hall v More [1928] 1 W.W.R.400 (BCCA)

The B.C. Court of Appeal has indicated that objectionable non-competition clauses will not be severed unless the balance of the agreement would be a sensible and reasonable obligation in itself such that the parties would unquestionably have agreed to do it without varying any other terms. accepted the proposition that a restrictive covenant clause could be severed from an agreement.

Canadian American Financial Corp. (Canada) Ltd. v. King (1989), 36 B.C.L.R. (2d) 257 (C.A.)

Severance is permissible only when the core of the bargain will remain after the unreasonable parts are struck out.

Similarly, the doctrine of severability is more rigorously applied to restrictive covenants negotiated between an employer and employee. The policy is to discourage employers from using their dominant position to extract unreasonable terms.

ACS Public Sector Solutions Inc. v. Courthouse Gechnologies Ltd. 2005 BCCA 605 at para 49

Following the Elsley case, restrictive covenants contained in contracts of employment are more examined and less likely to survive a challenge than the same covenant in relation to the sale of a business.

Elsley v. J.G. Collins Insurance Agencies Ltd. (supra)

The English Courts adopted rules relating to the severance of contractual terms under the blue line approach. The Supreme Court of Canada has now endorsed the availability of severance beyond the traditional blue line approach; the Supreme Court views the availability of severance as a remedy and technique for affecting severance. Currently, the Court will go further than striking words out of the contract to the point of inserting terms to render a contract enforceable. Although this process may not be appropriate in the case of non-competition clauses, there remains a risk of the Court effectively rewriting the clause to give efficacy to the agreement.

Transport North American Express Ltd. v. New Solutions Financial Corp. (2004) 1 S.C.R. 249

Accordingly, in summary, although non-competition clauses will provide some ongoing measure of protection to employers, they will remain difficult clauses to enforce against employees. Although there is interest in making those clauses enforceable, severance or alteration may not provide all of the protection an employer desires from an employment contract.