Efforts to cut costs in the current economic downturn have highlighted limitations on an employer’s flexibility. Employers can’t change the law, but they can take steps to mitigate its effect and enhance their ability to deal with change.

The Legal Hurdles

Employment Contract Law

The non-union employment contract in Canada is subject to the usual laws of contract, with the added complication that any uncertainty will likely be resolved in favour of the employee.

Most importantly, employment is not “at will.” For employers who are familiar with “at will” employment in the United States, this can seem to be a major hurdle. Instead of having the right to end an employment relationship whenever they please, Canadian employers can only terminate employment for just cause or with some notice or compensation in lieu of notice.

The same goes for changes an employer wants to make. It is not possible to impose changes in the terms of employment without just cause, notice, or an agreement with the employee supported by new “consideration.”

Consideration is a legal term meaning “benefit.” In the absence of just cause or notice, a change to a contract will only be valid and binding if each party receives some consideration from the other.

Lack of work, economic difficulties, loss of customers and other challenges faced by employers may give “business cause,” but it is not “just cause” that will allow for layoffs, terminations, lower compensation or reduced hours.

Legislated Employment Standards

Minimum employment standards are in place across Canada. There are legislated minimums for:

  • vacation time and vacation pay;
  • amounts of notice or compensation (and in some jurisdictions, benefits) to be provided when terminating employees;
  • group terminations (usually 50 or more); and
  • when a layoff will be considered a termination.

Human Rights

Any layoff, termination or change to terms and conditions of employment may be scrutinized under human rights law. Employers are not allowed to discriminate on the basis of prohibited grounds of discrimination such as age, sex, race, religion, disability or family status.

If a change affects an employee within one of the protected grounds, the employer may be challenged and will have to prove the protected characteristic:

a) was not a factor in making the change; or

b) could not be accommodated without undue hardship.

Regaining Flexibility — Lessons for Employers

There are ways to get over these hurdles and to regain some flexibility in dealing with change. Here are some ideas to consider in revising employment documentation and administration.

Contract / Policy Language

Duties

Avoid contract language and job descriptions that limit your ability to make necessary changes from time to time in the employee’s duties.

To facilitate future changes, including promotions, the employment contract should state that the terms will continue to apply in the event of any change in duties or position, except as otherwise expressly agreed in writing.

Layoffs

Consider introducing employment contract clauses or a policy that will allow for temporary reductions in staff when necessary.

Termination Clauses

If you already have termination clauses or policies, review them for compliance with minimum standards. Also check to ensure that the contracts were properly entered into, or that the policy has been incorporated into the employment contracts.

If you don’t have termination clauses or policies, make them part of offers of employment for new employees. It is also possible, with proper notice or new consideration, to introduce termination clauses into existing contracts of employment.

Benefits

Make sure your documentation is clear about who — the employer or an insurer — is responsible for paying out on a benefits plan.

Draft language in your employment documents to allow you to make changes to the benefits and their terms.

Pensions

To the extent allowed by applicable pension regulations, have language that allows for changes to the pension plans and their terms, especially with respect to employer contributions.

Vacations

Distinguish between the minimum vacation you must provide and the extra vacation you may allow, with the extra having “use it or lose it” provisions and possibly being subject to the needs of the business as determined by management.

Commission Plans

Consider fixed terms for commission plans, with the employer being able to make changes for each new term to meet the changing needs of the business.

Bonuses and Stock Options

Strengthen the language regarding management “discretion” and revisit bonus formulas or option grants that are seen as “automatic.”

If you don’t want bonus and stock option rights to accrue after termination, explicit language is required to avoid accrual until the end of the period of termination notice or compensation.

Contract and Policy Administration

Once the necessary language is in place, the contracts and policies must be administered consistently and in accordance with their language. Otherwise, a court will likely favour the employee-friendly practices over the language.

Hiring Process

Make sure that all important terms of the proposed employment contract are part of every offer of employment, and that employees have signed and delivered their agreement before they start work.

Changes During Employment

Document every change of significance, and the employee’s agreement, before the change takes effect. Also confirm that all other terms of employment continue in force. If the change is to the benefit of the employee, e.g., a promotion, that will be consideration for the employee’s agreement. For other types of changes, some form of consideration will be needed to make the revised agreement enforceable.

Variable Pay

Regularly reiterate — with every payment or grant — the extraordinary and discretionary nature of variable pay items. If the commission, option or bonus plan can be changed, communicate changes before they are implemented.

Hard times teach valuable lessons. Now is the time to put the lessons learned into action and get some gain out of all the pain.