A common misconception amongst business owners is that employment agreements with employees aren’t necessary because all legal rights are set out in the Employment Standards Act 2000 (ESA).
The ESA outlines the minimum standards that employees and employers must follow in Ontario. Its defines, amongst other things, minimum wage, vacation allowances, overtime pay and leaves of absence. As an employer, you can choose to offer terms or compensation more favourable than the minimum standards but you do not have the right to offer less.
The ESA also defines the minimum standards for terminating a working relationship. But, while such standards are clearly set out under the ESA, they must also be put in writing to avoid exposing yourself to greater liability and expense.
Reasonable notice of termination
Under the ESA, if your company terminates an employee who has been continuously employed for at least three months, you must provide that employee with working notice of termination, pay in-lieu of notice, or a combination of both. The amount of notice/pay required is one week per year of service up to a maximum of eight weeks. For example, an employee of three years must receive three weeks notice or receive the equivalent of three weeks pay (including any group health and welfare benefits).
However, without an employment agreement that specifically states that entitlements to notice of termination are the minimum standard set out in the ESA, obligations are determined by the courts at common law (law that is developed from judicial decisions of courts and similar tribunals).
The courts, in many cases, imply “reasonable notice” that is often much higher than the minimum standards in the ESA. Under common law, an employee’s length of service as well as salary, age, education, years of experience and the availability of comparable jobs in the marketplace are all considered when determining reasonable notice. While there is no hard and fast rule or formulaic approach applied by the courts, reasonable notice has been applied in a range of several weeks to over a month per year of service. And, there is no express cap or “maximum” under common law. Awards have been given out as high as 24 months.
This means that an employee with three years of service may be entitled to three months of pay in-lieu of notice instead of the three weeks required by the ESA. Do you really want to be required to pay more than necessary? In some cases, it could be more than four times the required amount under the ESA.
You will, in many cases, without an employment agreement. But this can be avoided with a well-drafted agreement.
If your company’s employment agreement is poorly drafted, fraught with errors or even ambiguous, the clause will likely be unenforceable (which means you are responsible for the more onerous obligations under common law). Employment agreements should be properly drafted and should set out and limit employee entitlements upon termination. Employment agreements, to be enforceable, must be in compliance with the ESA, must be clearly drafted and must be unambiguous.
It’s in every company’s best interest to invest a little money up front to have a well drafted employment agreement drafted by a lawyer to ensure that, should you ever need to terminate an employee, you will only be on the hook for the minimum standard required by the ESA (or whatever greater amount you may want to offer to your employees), not an amount imposed upon you by the courts.