Drafting Employment Contracts: Avoiding Surprise and Liability

Previously printed in the CCH’s Focus on Canadian Employment and Equality Rights Newsletter.

If drafted properly, employment agreements can go a long way towards mitigating potential employer liability upon termination. However, if contracts are drafted poorly, or not drafted at all, employers may be left with nothing more than a false sense of security. The following cases illustrate this Jeckyl and Hyde nature of both express and implied employment agreement terms.

In Maxwell v. British Columbia, [2014] B.C.J. No. 2239 (C.A.), the B.C. Court of Appeal was addressing a situation where the employee had entered into a contract of employment with her employer, the B.C. College of Teachers, that set out an escalating termination notice entitlement based on the employee’s age and years of service. By late 2011, the contract language prescribed that she was entitled to 24 months’ notice of termination. Around this time, the B.C. government legislatively dissolved the College, replacing it with another administrative body. At law, this would have the effect of terminating Maxwell’s employment. Probably recognizing the potential liability for termination notice, the government offered Maxwell continued employment with the successor entity. However, Maxwell declined the offer and sued the government for the College’s failure to provide notice or pay in lieu in terms of her contract of employment. The government defended itself in a number of ways, including by arguing that Maxwell had failed to mitigate her damages by accepting the new employment. The lower court rejected that argument, and awarded Maxwell $271,000 in salary and other benefits in accordance with her contract.

The Court of Appeal confirmed that decision. In rejecting the government’s mitigation arguments, it reasoned that her contract of employment specifically provided for the consequences on termination and, in the absence of mitigation language, she had no obligation to accept the government’s offer or otherwise mitigate her damages.

Following this case, one might question the wisdom of prescribing the notice owing at termination without cause. However, doing so remains good practice because it can limit the amount of notice owed and it can also avoid the costs and uncertainties of potential or actual litigation concerning the quantum of common law reasonable notice. The fix for the problem flowing from the above case is for the contract to also include a provision stating that an employee has an obligation to mitigate his or her loss of employment by taking reasonable steps to find alternate employment and, in the eventuality that such employment is found, prescribing that any income earned therefrom can be deducted from the notice payment.

The Ontario Court of Appeal decision in Arnone v. Best Theratronics Ltd., [2015] O.J. No. 461 (C.A.) is another example of an employer paying more than it thought it had to, because of a lack of any clear contract language limiting liability. In that case, one of the issues on appeal was the lower court’s award of 30 weeks’ pay as a retiring allowance, in addition to the reasonable notice award. The court had made that finding on the basis of evidence that the employer had a customary practice of giving employees a bonus of one week per year of service at retirement. The Court of Appeal held that there was an implied term to give the employee the retiring allowance, notwithstanding that the employment had ended as a result of a termination by the employer rather than a retirement. The Court of Appeal reasoned that if the employer wanted to limit an employee’s entitlement to this benefit, it should have reduced the limitation to writing. Since that had not occurred, the employer was liable for the retirement payment over and above the notice owing at termination.

Since the Supreme Court of Canada rendered its decision in Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986, employers have been required to ensure that their contractual notice provisions not specify termination notice that is less than the minimum notice required by employment standards legislation. If a contract fails to meet such standards, it will be held to be void, and the common law rules concerning reasonable notice will apply. In Miller v. Convergys CMG Canada Ltd., [2014] B.C.J. No. 1997 (C.A.), the B.C. Court of Appeal had to address this principle in light of a contractual provision allowing for offending contract language to be severed from the employment contract. The employee had started his employment in 2003, and worked his way up to a management position. In 2006, he signed a new employment contract that included a probation provision, stating his employment could be terminated without notice within the first 90 days. The contract also stipulated that if he were to be terminated without cause, he would be entitled to notice in accordance with the B.C. Employment Standards Act. The latter clause did not violate the principles set out in Machtinger. However, Miller argued that the contract was unenforceable because the probation period breached his minimum statutory rights with respect to the probation period. That is, when he entered into the employment agreement in 2006, he had already been working for 3 years, and as such he could not be terminated in the probation period without notice, as contemplated by the contract. Here is where the severance clause saved the employer: the trial judge and Court of Appeal concluded that the offending probation clause could be ignored because of the severability clause. In February 2015, the Supreme Court of Canada denied an application for leave to appeal that decision, meaning that this decision may well have influence across Canada.

Key lessons for employers

 In each of the above cases, the respective employers could have avoided liability by having properly drafted contracts in place. First, it remains advantageous to limit the notice or pay in lieu owing in a “without cause” termination to something other (and less) than that prescribed by the common law. However, in addition to that language, employers should also impose a contractual mitigation obligation on employees, with a corresponding clawback for monies earned during the notice period. Second, employers should consider adding a severance clause to their employment contracts. In many circumstances, this will save them from the obligation to pay reasonable notice at common law, as in Miller v. Convergys CMG Canada Ltd., as well as a host of other potential pitfalls. Finally, employers should consider contractually limiting obligations on termination of employment which are associated with existing practices or contractual terms to other forms of payment, so as to avoid the kind of double recovery manifest in Arnone v. Best Theratronics Ltd.