Part 1 in this series discussed the hiring process. This part considers the next step, which is establishing and documenting the terms and conditions of the employment relationship.
Once the successful candidate has been selected, the employer needs to make an offer of employment. An offer can be verbal or in writing, but the best practice is to put the offer in writing so there are no questions about the terms and conditions of the job being offered.
It is also important that the offer be expressed in advance of the employee’s start date. For any contract, including an employment agreement, to be valid and enforceable, it needs to be founded on “consideration”. Consideration is a legal term referring to something of value that passes back-and-forth between the parties to a contract.
In the case of an employment contract the consideration the employee offers to the employer are his or her labour services, and the consideration the employer offers the employee is the job itself.
It causes problems when a general offer of employment is expressed and then the employer comes to the employee with a written agreement after the employee has started work. This is because past consideration cannot form the basis of an agreement that has already commenced. There are ways to put an agreement in place after an employee has started work, but that is more technical and outside the scope of this article.
The best practice is to present the employee with an offer letter and a written employment agreement setting out the terms and conditions of the employment relationship prior to the proposed start date. Of all the things that can be drafted into an employment agreement, the most important, in my view, is a properly worded termination clause that sets out how much notice or severance the employee is entitled to receive if the employment relationship is later terminated on a without cause basis.
In the absence of a termination clause, the employee’s severance entitlement is governed by two sources, first, the Alberta Employment Standards Code (the “Code”), and second, the common law.
The Code sets out the minimum terms and conditions of employment in Alberta. Think of it as a floor rather than a ceiling. No employer is allowed to contract below the minimum protections set out in the Code, and any attempt to do so is considered void and unenforceable.
The Code sets out the basics of employment law in Alberta, and applies whether or not there is a written employment agreement. Here are some of the items covered in the Code:
- When wages have to be paid
- Employment records that must be kept
- Hours of work
- Overtime
- General holidays
- Vacation
- Maternity and Parental leave
- Termination of employment
Pursuant to the Code, the following is the amount of termination notice or termination pay an employer is required to provide to an employee if that employee has been dismissed without cause:
- More than 90 days but less than 2 years = 1 week
- 2 years or more but less than 4 years = 2 weeks
- 4 years or more but less than 6 years = 4 weeks
- 6 years or more but less than 8 years = 5 weeks
- 8 years or more but less than 10 years = 6 weeks
- 10 years or more = 8 weeks
The employer cannot contract out of this requirement.
Also take note that 90 days and three months are not the same thing. The Code used to refer to three months but has been amended to 90 days, which is shorter than three months. Older employment agreements that refer to three months may now be in violation of the Code, and those termination clauses may as a result be unenforceable.
The Code also contains a provision frequently referred to as the “greater benefits” section. Section 3(2) allows Employment Standards to enforce greater benefits offered to the employee. As an example, if the employer offers four weeks of vacation rather than the statutory minimum, the employee can ask Employment Standards to enforce the greater benefit provided, not just the minimum amount the employee would otherwise be entitled to pursuant to the Code.
The common law is the body of law that has been made up by judges when deciding past cases. It is more expansive than the Code and typically offers greater benefits, particularly when it comes to severance. Think of the common law as a ceiling rather than a floor. The employer can contract out of the more generous provisions of the common law, provided it does not go below the minimum protections set out in the Code.
The common law is imprecise, as it is based on the view of whichever judge happens to be assigned to hear a case. This is probably the best reason for an employment agreement – to make sure the parties know the terms and conditions of employment ahead of time.
Without a valid limitation on the amount of reasonable notice or severance the employee is entitled to receive when dismissed without cause, the common law is going to offer a great deal more than the Code. The problem is determining how much more because it is not an exact science. Most often it comes down to a consideration of past cases, and what the judge assigned to the case thanks. If 10 different judges heard the same case independently you would expect to receive 10 different answers to the question of the appropriate amount of severance. While the answers between Judge 4 and 5 might be reasonably close, the delta between Judge 1 and judge 10 could be significant.
When trying to calculate what a common law reasonable notice period might be, reference is frequently made to a so-called “rule of thumb”, or a guideline, that an employee is entitled to a month of notice per year of service. That is incorrect. There is no such rule or guideline. There are many cases where short-term employees have received much more than a month of notice per year of service, and very long-term employees have received less. The only way to deal with this risk is to set out in advance, through an employment contract put in place prior to the employee’s start date, that specifies the exact amount of severance the employee will be entitled to receive. If done properly, the employer can contract all the way down to the minimum amount set out in the Code.
It can be very tricky to do this properly and every employer would be well advised not to try to do it without legal advice. Judges generally do not like clauses that reduce the amount of common law severance the employee might be entitled to receive and if they can find a way to rule a clause unenforceable, they will. Poorly drafted clauses can be expected to meet this fate.
My advice to clients is to always have a termination clause in an employment agreement. That way, even if mistakes are made in managing the employment relationship, the employer who may not be able to establish just cause as a result of those mistakes will still know in advance the cost of a dismissal and can make decisions with that in mind. From my perspective, a properly worded termination clause is the single most important part of an employment agreement.
