The Case for Employment Contracts in the Restaurant Industry

Labour shortages, labour uncertainty, and staff training are three of the hottest topics affecting the restaurant industry as regulatory controls designed to address the spread of COVID-19 have lifted, and Canada settles into living with the pandemic and adjusting to its cumulative effects from the past two and one-half years.

Against that backdrop, while the use of written employment contracts has never been the norm for the restaurant industry, it is argued here that these businesses can utilize these contracts to help address various of the unique labour challenges now faced by the industry.  For businesses that already use written employment contracts, it is recommended that those contracts be reviewed to address their current enforceability as a result of recent court decisions.

Basic principles and considerations applicable to employment contracts

Before discussing the specific content of written employment contracts, it is useful to review some basic principles and considerations applicable to all employment contracts:

1. in order for these contracts to be valid, they must be entered into before the employee starts their employment;
2. if an employee does not have a contract, one can be presented to them for required acceptance at the time of any proposed promotion or proposed new benefit, such as a raise in pay, or bonus;
3. if an employee does have an employment contract, depending on its terms, a new one can be presented to them for required acceptance at the time of any proposed promotion or proposed new benefit;
4. employees are not required to obtain legal advice before entering into an agreement; however, as a best practice, they should be encouraged to do so, or at least given a reasonable opportunity to do so;
5. in some provinces, (such as Ontario) employees cannot be bound to post-termination non-competition covenants. In Ontario, this restriction generally applies to all non-senior executive positions;
6. many employers use employment contracts to limit the amount of common law notice they must give to an employee when they want to terminate the employee for reasons other than for cause. The industry has typically not resorted to written contracts as this is usually not a serious concern for restaurateurs. To that end, most employees are not employed long enough by the same employer for this to matter much; employees who are let go can easily mitigate their damages in markets such as this, and the amounts in issue are not particularly significant for most employers. Nevertheless, many written employment contracts which have been in use contain termination provisions that the courts have invalidated.  These provisions need to be reviewed and updated where possible. More about this below.

Employment contracts provide flexibility

The fundamental benefit of an employment contract is to give the employer flexibility in how the employee can be employed. By way of a few typical scenarios demonstrating the need for such flexibility, in many restaurants these days, managers are increasingly needed to work the floor, the bar, and the kitchen. Without provision for this flexibility in an employment contract, a manager might claim to be constructively dismissed if, for example, they are required to fill the role of a dishwasher for any extended period of time. Similar concerns may arise for an employer with various locations that require its employees to work at different locations as directed by the employer. To the extent this possibility was not set out in an employment contract, depending on the degree of hardship involved in attending multiple business sites, an employee may have grounds to resist such direction. As another common example, consider also the need for the ability to vary or increase an employee’s scheduled working hours, or location where they work, with little notice to respond to issues arising from staff shortages.

The content of employment contracts

While a review of the full range of potential content in a written employment contract for use in the restaurant industry is beyond the scope of this article, the following list touches on a number of key provisions for consideration by an employer when drafting such agreements:

1. Bonuses/ profit-sharing – A written employment contract can address with much certainty how any bonus or profit-sharing entitlement will work. For example, it is not uncommon for the discretionary nature of any bonuses to be described in language which protects the employer and which also makes such bonuses payable only if the employee is employed at the time the benefit is stated to be payable.
2. Compliance with vaccination policies – A written employment contract can specify whether and to what extent the employee is required to comply with vaccination policies and what may or may not be required in the case of any illness or symptomatology. Whether contained in a written employment agreement or not, it is important that you obtain advice on your vaccination policies as there are human rights and accommodation issues that arise that should be addressed when formulating such policies.  Much has been written on the topic and there are divergent views.
3. Restrictive post-termination covenants – Although non-competition agreements for non-senior executives are invalid in Ontario and in many cases in other provinces, there are measures an employer can take to obtain related protections in the circumstance of a departing employee. For example, an employer can be specific as to which intellectual property it is entitled to protect and how it will do so. Those lawful protections are best set out in an employment contract, the fact of which also serves as evidence of the employer’s genuine interest in protecting its property.
4. Modification to benefits – Businesses may also want the flexibility to modify any benefits they may provide to their employees. The right to change or cancel benefits is a matter which can be included in a written employment agreement.
5. Layoff provisions – A written employment contract can also contain an express right of the employer to lay an employee off for a limited period of time without the layoff being considered a constructive dismissal at law. This is a very important consideration given the experience during the pandemic where employers were required to ask employees not to come in from time to time and for lengthy periods. Fortunately, the government also addressed this issue by regulation to support employers during the pandemic, but a properly worded contract can avoid the problem.
6. Notice requirements – A written employment contract can set out how much notice the employee may have to give if they want to quit. Subject to the minimum requirements provided for, in provincial employment standards legislation, the contract can also specify the required notice that the employer must give in a without-cause termination situation.  The parties can also agree on the circumstances in which the contract will be determined to be “frustrated” or terminated as a matter of law, for example, if the employee is unable to work for a certain extended period due to any prolonged health issues. Courts do tend to be extremely rigorous in their analysis of these provisions such that any deficiency will tend to invalidate them in favour of the employee.  The likelihood of such provisions surviving a challenge is increased if notice is not limited to minimum employment standards requirements but rather includes something more, even if less than common law notice.
7. Termination provisions – A written employment agreement is particularly useful in defining what constitutes cause for dismissal which would allow the employer to terminate the employee’s employment without any notice or pay in lieu of notice, such as in the instance of fraud, theft, or deception. Based on recent authority, dismissal for cause is viewed strictly by courts and will not be enforced unless the conduct is extremely serious as reflected by these examples.
8. Severability – A written employment contract should contain a provision that allows any provision which may be found to be unenforceable severable from the balance of the contract so that the balance remains enforceable.

An alternative to employment contracts and independent contractor agreements

As an alternative to requiring the employee to sign an employment contract, before their employment begins, an employee can instead approve a description of their prospective role which is broadly drafted to address certain of the issues identified above.  For the employer who may want to avoid the formality of a more detailed contract, this is a minimum best practice.

If a prospective worker is in fact an independent contractor and not an employee, and the business wants to ensure that the person is categorized as such, a written independent contractor agreement rather than an employment contract is strongly recommended.

There are many critical differences between employees and independent contractors, which can affect the content of a business’s written independent contractor agreement. As a few examples of these differences, independent contractors are not entitled to the various rights and protections contained in provincial employment standards legislation, such as in respect of termination rights, rights to disconnect, vacation pay, etc. It is also noted that a business is not required to withhold and remit for income tax payable by a worker or to comply with other government-required deductions where that worker is an independent contractor (as opposed to with employees).  The taxing authorities, however, will look at the substance of the arrangement to determine if employment taxation applies regardless of the way the parties have described their agreement. A mischaracterization can be costly to a business if monies are found due to the government. To that end, and without being exhaustive, critical indicia of an employment versus an independent contractor relationship include the business’s control (or lack thereof) over hours worked, the worker’s right or inability to work for multiple businesses, the full-time nature of the work, and the ability to exercise control over and provide direction to the worker.  In addition to taxing authorities, other government agencies such as labour boards and workers’ compensation can scrutinize these arrangements and decide the matter on the basis of substance over form.  Legal advice should be obtained before characterizing a relationship as that of an independent contractor.

Further incentives to utilize written employment contracts

In addition to the foregoing benefits of utilizing written employment contracts, these contracts are easy to prepare and can be drafted in a general template form applicable to every position within the restaurant, from the general manager position down to various part-time worker roles.

However, it is crucial to note that any template that was not drafted by a human resources/employment law specialist in 2022 may contain unenforceable provisions or, at worst, may be unenforceable in its totality. For example, as noted above, an employment contract that contains an unenforceable non-competition provision, but which fails to also contain a “severability” clause, may not be enforceable at all.  For businesses with employment contracts like this, it is important that they seek legal advice to determine what strategies are available to them to address this potential concern. To avoid this and other pitfalls, it is best not to use an old form of the employment contract but to obtain advice on preparing a current form reflecting up-to-date industry best practices. Furthermore, it is also highly recommended that existing employment contracts be reviewed regularly by legal professionals to ensure they remain in compliance with the law.  Courts regularly issue employment decisions, some of which can materially change the responsibilities of employers and impact the enforceability of contracts or contractual provisions.

In addition to drafting written employment contracts in response to new legal decisions and employment standards legislation, there are numerous other pieces of legislation that impact employers’ obligations to employees, including those relating to worker’s compensation, occupational health and safety matters, and human rights. Whether or not a business is preparing new employment contracts or updating existing contracts, it is always advisable for employers to proactively undertake periodic reviews of their obligations or have access to resources that update them on what they need to know when managing any sized workforce. For example, we have come across a number of Ontario restaurants that inadvertently missed recent legislative amendments which require them to make their washroom facilities available to those participating in the gig economy, such as third-party delivery drivers. With that in mind, it is recommended that employers review the Future of Work Report which can be found at www.Ontario.ca/document/future-work-Ontario to get a glimpse at where future government regulation may occur.

Allan Dick, Sotos LLP

At Sotos LLP, we assist many franchisors and other businesses in the food service and hospitality industry in handling and advising on employment-related matters affecting them and their systems.  If you have any questions relating to your workforce, please contact the author at  adjdick@sotos.ca or 416-805-8989.