Employment Contracts: Can you spot the pitfalls and risks?

By Graeme McFarlane

From an ambiguous policy manual to unclear provisions for termination, contractual terms can leave an employer vulnerable and liable. Know the rules and risks in your agreements.

Do you know the pitfalls that lurk within the contractual terms of employment agreements? You can take steps to avoid lurking risks and liability by knowing the limits of particular clauses, as well as the extent of certain statutory and common-law rules. If you don’t eliminate uncertainty, you might face a nasty surprise.

As most business people know, binding contracts occur when one side makes an offer and the other accepts, when value has been exchanged, and the parties intend to form a contract. All employees have employment contracts, whether written down or not. These generally involve a promise to hire in exchange for a promise to work, with specific terms and conditions varying in accordance with the parties’ intentions. These agreements must comply with employment standards and human rights legislation, as well as with various common-law principles. Besides the express terms of an employment contract, they also often contain “implied” terms; the latter  ones generally create the lurking risks to employers.

This article discusses three types of risk management terms that might be included in employment contracts: termination, non-competition, and non-solicitation clauses. It examines the enforceability of workplace policies, ending with an example of an unenforceable policy manual.

Avoid “implied” terms in termination provisions

Employment contracts often remain silent with respect to termination. In such cases, they will include the “implied” term that the employer, without cause, will provide an employee with a reasonable notice of termination. Known as common law-notice, this process considers various factors, including the employee’s position, age, education, tenure, pre-employment inducements, and the availability of comparable employment. For long-service employees, this notice can reach 24 months. If proper notice is not given, the employee might claim for the remuneration that he or she would have earned during the common-law notice period.

To reduce exposure to claims for common-law notice, the employment contract can contain termination provisions that specify what is required upon termination. However, this type of provision must comply with the minimum notice periods set by employment standards legislation, or a court might deem the provision invalid and common-law standards will again apply. Common-law notice periods are significantly longer than the statutory minimums. A properly constructed termination clause can greatly reduce employer costs.

Besides length of notice, an employer can address other issues in any termination clause, including conduct that would justify termination for cause, how the employer might pay notice, and the return of employer property upon termination.

Use non-competition clauses to protect business

If a departing employee finds employment with a competitor, the use of a previous employer’s information might negatively impact its business. The common imposes a duty of “good faith, loyalty and fidelity” on a departing employee; however, this stops when employment ends and only limited obligations survive. To reduce unfair competition, an employer can include non-competition clauses in employment contracts.

When the employment relationship ends without a non-competition clause, nothing prohibits competition with a former employer, as long as it is done fairly: ex-employees must not use confidential information (trade secrets, customer lists or special information acquired during employment) in their new positions. Here lies the difficulty: How do you determine what competition is unfair? This will depend on specific circumstances in each case. For example, copying the names of customers from the employer’s order book is a breach of the implied duty of good faith, while soliciting customers from memory might not be.

Depending on the position and competition concerns, both parties will benefit with a clear understanding of any non-competition agreement. A good non-competition clause should include the following:
• A general outline of the employee’s duties, including identification of specific, prohibited activities;
• The extent of the control of the employee’s outside activities during employment, which will depend on the employee’s status and his/her access to confidential information; and
• The employee’s obligation to protect the confidential information of the employer, including a definition of what is confidential, the limits of disclosure of this information, a protocol for appropriate disclosure, remedies in the event of a wrongful disclosure, and the procedure upon termination.

Protect client base with non-solicitation clauses

Non-solicitation clauses restrict a departing employee from soliciting clients, suppliers or other employees from a previous employer. These restrictions tend to focus on protecting the employer’s clients or customer base. Since common law offers no specific restrictions on solicitation, an employer must be especially clear if attempting to include them in terms and conditions of employment.

Non-solicitation clauses must be sufficiently specific to be binding; restricting a former employee from contacting anyone “likely to become a customer” of the former employer is probably too broad. The covenant should not limit solicitations of all employees, but rather only those who could pose a serious competitive threat. To be safe, an employer should ensure that the departing employee’s obligations are clear enough to cover both direct and indirect solicitation. This will ensure that a former employee, who argues that his wife, for example, controls the competing business, will not avoid the restrictions imposed by a non-solicitation clause.

Courts are generally reluctant to enforce non-competition and non-solicitation agreements because they do not want to prevent departing employees from earning a living. Consequently, the creation of these clauses requires care. However, if properly constructed, they can provide employers with valuable tools to protect their businesses.

How effective are workplace policies?

Employers’ policy manuals and handbooks might or might not form part of the parties’ agreement. To have contractual force, the policy should be incorporated into the employment contract at the time it is entered. Otherwise, once an employer and employee have entered a contract, it is difficult to change its terms.

An employer who tries to impose a policy after entering the contract might well have repudiated the contract, giving the employee a right to sue for constructive dismissal. Similarly, an employee who tries to impose a term unilaterally might give the employer the right to terminate the employee without notice.

Ambiguous policy unenforceable

A real-life example will best explain the enforceability of workplace policies. The B.C. Supreme Court in Rahemtulla v. Vanfed Credit Union, [1984] B.C.J. No. 2790 held that a workplace policy was unenforceable. An employer and employee entered a contract of employment. Several days later, on the day after she started work, the employee received a policy manual with a request that she read it. She did. Written in a mostly informational tone, the manual dealt with the employment relationship, duration of employment, termination, severance pay, and grounds for dismissal. However, the provisions regarding termination were ambiguous.

For various reasons, the court ruled this policy manual non-binding. First, there was no evidence that both parties intended to be bound by it. The employee did not communicate her assent by signature or conduct, and she had entered into the employment contract before receiving the manual. Second, the employer provided no new value to the employee in exchange for the promise to be bound by the manual; continuing employment does not satisfy the requirement for consideration when imposing a new obligation.

Third, the manual itself was far from comprehensive. The court held that by simply asking the employee to read it, the employer could not have intended it as anything more than an informational guide. Ruling the manual not binding, the court was left to determine the appropriate notice period in accordance with the implied terms of common law.

(PeopleTalk: Spring 2005)

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