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Legal Perspective: When compliant employment contracts don’t protect employers

Posted by on Oct 7, 2012 in HR Issues, Legal, Other | 0 comments

smallbizadvisor.ca

BY Sheryl Smolkin, lawyer and journalist | September 13, 2012

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Even when an employment contract complies with the Employment Standards Act, an employer can end up paying much more than expected if the contract is at all ambiguous.

A recent case demonstrates how employers are not always protected by legally correct employment contracts. Read on to learn what advisors and employers can learn from this case.

The case
When John Wright was hired as an executive at the Young and Rubicam Group of Companies, a marketing consulting firm, he signed an employment contract that set out his compensation package. It included a base salary of $230,000, a stock option plan, group insurance benefit plan, matching group retirement savings plan contributions and an annual bonus plan.

The employment contract also included provisions regarding termination without cause.

Five years later Wright was terminated. The Ontario Court of Justice ruled the whole employment contract was unenforceable because other parts of the standard agreement that did not apply to him violated the legislation. As a result, he was entitled to significantly higher common law damages for wrongful dismissal.

Based on the contractual terms when Wright was unjustly fired, the company offered him 13 weeks of base salary plus 13 weeks of RRSP contributions, car allowance payments and group insurance benefits. Life insurance and disability insurance were discontinued after 10 weeks—based on the statutory minimum requirement of five weeks of termination pay plus five weeks of severance pay.

Counsel for Wright argued that the employment contract as a whole had two major deviations from the Employment Standards Act requirements:

  • First, by stating “the payment will be inclusive of all notice statutory, contractual and other entitlements to compensation and statutory severance pay you have in respect of the termination of your employment” the contract specifically excluded employee benefits. Nevertheless, as noted above, the company offered Wright benefits coverage.
  • Second, the aggregate number of weeks of termination pay and severance for longer service employees was not compliant. For example, if Wright had been terminated after 8.5 years of employment, the contractual entitlement of 16 weeks of base salary would not have met the statutory minimum of 16.5 weeks.

Read more: Legal Perspective: Termination pay required after four years of LTD

Madam Justice Wailan Low totally invalidated the employment contract even though the provisions that applied to Wright in these circumstances were legally compliant, noting that any ambiguity should be resolved in favour of the terminated employee.

Because Wright was out of work for 12 months in spite of his efforts to find a suitable job sooner, the judge awarded him 12 months pay in lieu of notice, as opposed to the 13 weeks initially offered to him by the company.

What does this case mean for employee advisors and their clients?

Termination clauses are usually included in a Hiring Letter or Employment Agreement to inform employees, in advance, how much notice they will receive upon termination, whether the firing is with or without cause.

The amount of notice indicated in the termination clause is usually less than the employee’s full common law notice entitlements, but must provide at least the statutory minimums required by the Employment Standards Act, 2000.

However, as the case above demonstrates, in the event that the termination clause is drafted in such a manner that it provides—or even has the opportunity to provide less than the statutory minimums—the termination clause will be found to be unenforceable, thereby permitting the employee to receive their full common law notice entitlements.

To avoid such situations arising, all employment contracts should be reviewed by an experienced employment lawyer. Organizations with employment contracts that are several years old should consider having them reviewed and updated.

Read more: Protect clients from costly dismissal damages, a legal case study

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