I already discussed the importance of employment contracts/employment agreements (those expressions are used interchangeably) in this series. I would refer you specifically to the posting entitled #1 Termination pay, termination notice, termination with or without cause and pay in lieu of notice (Part 2). In that posting, I briefly discussed some of the advantages of having a written employment agreement in place with employees.
All employment relationships in Ontario are deemed to be contractual, whether or not a written contract is in place between the parties. When there is no written contract, the common law (judge-made law) imports a number of obligations into the contract that will bind the employer and the employee.
For an employer, these obligations include the obligation to provide work to the employee, to pay the employee for her work, the duty to provide a safe work environment, and the duty to act fairly (with respect to the organization of work, the right to discipline and the right to terminate). For an employee, these obligations include the obligation of subordination (i.e. to obey an employer’s reasonable orders), attend work on time, perform work competently, and the duty of good faith and fidelity (which includes the duty to avoid conflicts of interest and to maintain the confidentiality of employer information).
Outlined below are some of the common provisions contained in employment agreements that I would typically recommend for employers.
Termination of Employment
Arguably, the single most important obligation imposed on both the employer and the employee is to provide reasonable notice of termination of the employment contract. This obligation is imposed equally on employers and employees, however, the period of “reasonable notice” will vary widely for both. Except in the case of very senior or key employees, an employee’s obligation will likely result in a relatively short period, likely no more than two to four weeks. An employer’s obligation, however, can be much more onerous.
For this reason, managing an employee’s entitlements on termination is the principal advantage of having a written employment agreement. As you will have noted from reading this part of this series of posts, employment terminations can be a very costly affair for employers. They can also be very costly for employees when they are forced to engage in litigation with their former employers in order to determine their entitlements on termination. For these reasons, it is in everyone’s best interest to come to an agreement at the outset of the relationship on what each party’s obligations to the other will be.
The phrase “restrictive covenants” refers to any agreement between employers and employees that circumscribes an employee’s actions after termination of employment. The most common types of clauses that fit into this category are so-called non-competition and non-solicitation clauses.
Most employees are not subject to these types of obligations unless they are expressly written into their employment agreement. The only exception to this rule are employees who are deemed to be “fiduciaries” of the employer. In order to be considered a fiduciary, the employer must be especially vulnerable to the employee exercising her discretion in a manner to injure the employer. Given this very high threshold, it is very rare for an employee to be considered a fiduciary. Typically, they would need to be a c-suite employee or otherwise be a key employee (for example, a salesperson who is the “face” of the organization to a large number of important clients).
For the above reasons, to the extent an employer wishes to bind the employee to restrictive covenants, it is important that they be laid out in the employment agreement. It should be noted that non-competition agreements will be enforceable in only the very rarest of cases (only in circumstance where an employer can demonstrate that a non-solicitation clause would not be sufficient to protect its legitimate business interests), so the focus should be on well-crafted non-solicitation clauses.
Copyright, patents, and other intellectual property rights created in the course of employment will not always automatically vest in the employer. Although an employer may more easily assert their right in any copyright of works the employee creates in the course of employment, the same cannot be said of all other intellectual property rights. To the extent the employee will be creating works in which there may be copyright, the right to apply for patents, or other intellectual property rights, it is essential that the employment agreement contain provisions that result in the automatic assignment of such rights (with no additional compensation) as well as the waiver of any intellectual property rights that cannot be assigned (ex. moral rights). Failure to have these types of provisions can result in expensive litigation where an employee challenges the employer’s interest in any work she creates.
Incorporation of Plan Document and Right to Make Changes
To the extent employees will be entitled to participate in any employee benefit plans, pension plans, incentive compensation plans (including bonus and commission plans), and equity plans (including RSU, share option, PSU, or other equity award), it is essential that the terms of such plans be incorporated into the employment agreement by reference. Further, an employer should reserve the right, both in the plan documents as well as in the employment agreement, to make changes to those plans.