Limiting Notice Obligation in an Employment Contract – Don’t Forget Benefits

Written employment contracts are valuable tools to allow employers and prospective employees to agree in writing on the terms of the employment relationship between the parties.  Parties can use a written contract to evidence their agreement on the employee’s proposed title, base compensation, entitlement to bonuses and benefits reporting obligations, job functions and other expectations of the position.

Commonly, as well, the parties will negotiate and reduce to writing the terms under which the employer can terminate the employee’s employment.  Under Ontario (and other Canadian) legislation, there are statutory notice requirements for an employer to terminate a position of employment where the employer does not have legal “cause” to terminate without notice.

Statutory notice requirements are considered “minimum” requirements.  Canadian common law has long recognized that employers may terminate any employee’s position of employment without paying damages (unless there is a fixed period of employment) even though there is no legal “cause” so long as the employee receives reasonable notice of the termination or pay in lieu of such notice.  This “common law” notice requirement which results in longer notice periods than prescribed by statute, however, can be reduced or eliminated by a properly worded employment contract negotiated before the parties enter into the contract.

Three important aspects of drafting employment contracts seeking to include termination provisions have recently been highlighted in cases coming out of the Ontario courts:

1. Employment agreements seeking to limit notice must be entered into before employment commences. If an employer wants to modify the termination obligation after employment begins, the employee must be given fresh consideration (ie. not the promise of continued employment) for the modification.  This can be done, for example, as a condition of promotion or salary increase.
2. During a period of notice, an employee is entitled to continue to receive his or her benefits. If the contractual termination provision is ambiguous or does not address benefits such that the contract would be interpreted to not have them apply at least during the statutory minimum notice period, the whole termination provision may be struck. The common law only permits parties to contract out of common law standards and not statutory minimums.  It is incumbent therefore for a drafter of an employment contract to turn her or his mind to how benefits will be treated during the notice period and not offend statutory minimums.
3. If the parties’ intention is to limit an employee’s right to receive a bonus for work performed if the employee’s position of employment is terminated, the contract must address this carefully and precisely. It is not uncommon for bonuses to only be payable if the employee is employed at the time the bonus is to be payable.  If that occurs during the notice period, the employee’s entitlement to the bonus is preserved.  If it is the intention of the parties to modify that right, the contract must be clear in providing for what is intended.

As with any contract, employment contracts must be drafted with precision to avoid ambiguous and unintended results.  Courts tend to interpret employment contracts strictly against employers particularly with termination provisions that seek to limit notice to statutory minimums.  Many employers therefore choose, as a matter of prudence, to be more generous when setting notice than what the statutes might allow to increase the likelihood that their contractual notice provisions will withstand scrutiny.  Employment contracts require an understanding of the limits of their use and the special considerations that must be taken into account as a result of employment standards legislation and the common law affecting their permitted content.

Employers are advised to consider whether it is in their best interests to utilize written employment contracts and to periodically review their forms of contract in use to ensure they reflect the current state of the law.

At Sotos LLP, we assist employers in the drafting and negotiating of their relationship contracts  including with all levels of employees.