Employment Contracts 101: A Guide for Canadian Employers

A comprehensive and clearly-worded employment contract is essential to protect the interests of your business and your staff. An employment contract is mutually beneficial to both the employer and employee as it provides clarity on the rights and responsibilities of both parties. A well-drafted agreement also reduces the risk of legal claims for the employer.

What is an employment contract?

An employment contract (also called employment agreement), is a legally binding agreement that governs the employment relationship between employers and employees. It details the employee’s rights, working obligations, roles, and responsibilities, and sets the overall parameters in place for the work period. Up until the contract is signed by both parties, either party can suggest changes to the agreement or make necessary edits.

Outlined below is key information that employers should know about employment contracts.

What is included in an employment contract in Canada?

Employment contracts detail employee job duties, salary, benefits, company policies, and more. Ensuring the role of the employee is clearly outlined in a contract, prior to them starting their job, can help avoid future confusion or disagreements over the scope of their role.

An employment contract that clearly defines the terms of employment and rules of the workplace can serve as a reference guide in case of a disagreement. Employment contracts often include dispute resolution procedures that help avert long legal battles and the time and costs associated with them.

What are the different types of employment contracts?

There are three main types of employment contracts in Canada:

• Indefinite-term contracts
• Fixed-term contracts
• Independent contractor agreements

What are indefinite-term contracts?

Indefinite-term contracts are used for employees who have permanent jobs within a company. While these contracts lay out the terms and conditions of employment, they do not set an end-date for the employment relationship.

When indefinite-term contracts are ended without cause, employees are entitled to notice of termination and/or termination pay. If these contracts are terminated with cause, employers are not required to provide notice of termination or termination pay.

What are fixed-term contracts?

Under fixed-term contracts, the employment relationship exists for a fixed or specified period. Since the termination date is agreed upon before commencing the employment, no notice or pay in-lieu is required when the contract term ends.

But if the contract is terminated without cause before the pre-set termination date, the employee is entitled to the remaining value of the fixed-term contract.

What are independent contractor agreements?

These agreements are entered into with self-employed individuals or freelancers for the duration of specific projects. As independent contractors are not employees, they are not covered by the applicable employment standards legislation. The independent contractor agreements typically include a confidentiality clause. This ensures the independent contractor will not share sensitive business information with anyone, except authorized company employees.

What are some basic areas to include in an employment contract?

Besides the minimum entitlements and conditions required by your provincial employment standards legislation, the clauses and policies you may want to include in your employment contract will depend on your industry and the type of employment (full-time, part-time, contract, project-based, etc.) being offered.

Some basic terms of employment to address in your job contracts are:

• Hours of work
• Job responsibilities
• Salary, bonus, benefits
• Conditions of offer (reference check, background check, and so on)
• Privacy and confidentiality clauses
• Layoff clause (giving the employer the contractual right to alter certain terms of employment when needed)
• Disciplinary procedures
• Termination clause

What are some things to keep in mind while drafting employment contracts?

Employers, especially those operating a nationwide business, should remember that employment law varies across provinces. The terms and provisions that apply to an Ontario employment contract will slightly differ from that of a BC employment contract or one for Alberta.

To be considered valid, your job contract must follow the minimum terms and entitlements (wages, work hours, leaves of absence, etc.) set by the employment standards legislation in your province. While employers are free to offer more benefits to employees, they cannot provide less than the minimum entitlements outlined in their province’s employment standards act. Your employment contract and company policies must also comply with the provincial occupational health and safety law and human rights legislation.

Here are some best practices to follow while creating employment contracts:

Provide the employee with adequate time to review the contract

Giving the employee several days to one week to review the contract allows them to thoroughly peruse it and seek independent legal advice if they wish to do so.

Have the contract signed prior to the first day of work

The employee should agree to the terms of their employment before beginning work to avoid discrepancies over the work agreement. Also, having a work contract signed after the employee’s start date can result in any onerous terms within the contract being unenforceable for lack of consideration.

Always use clear, detailed language

Any wording in your work contract that is vague or leaves room for ambiguity may expose you to potential legal claims.

Attach relevant documents to the employment contract

If the job contract refers to other documents (for example, employment policies or a code of conduct), these documents should be attached to the employment contract for the employee’s reference.

Update your employment contract

Employers should update their employment contracts and policies in compliance with changing legislation and legal requirements. At times, the modifications required may be due to internal changes, such as business restructuring, pay raises, promotions, etc.

It is critical to keep in mind that employers cannot change certain terms of employment (such as salary, location, work hours, etc.) mentioned in the contract without the employee’s consent or a contractual right to do so. Doing so in the absence of mutual agreement or contractual rights may be considered constructive dismissal and may lead to litigation.

Should I include a confidentiality clause?

Employment Agreements often have a confidentiality clause, which protects a company’s information from being shared externally. Confidentiality clauses prohibit employees from sharing this information during, and after, their employment.

A confidentiality clause is what is known as a restrictive covenant. Restrictive covenants effectively restrict an employee from certain actions such as poaching clients or disclosing private company information.

What is a non-solicitation clause?

Another restrictive covenant that can be included in an employment contract is a non-solicitation clause, where the employee is prohibited from hiring or enticing employees or contractors away from the employer during or after their employment.

Does an employment agreement need to include a probationary period?

A probationary period is the duration of time in which an employer has the right to terminate an employee without notice. It is up to the employer how long their probation period is, however, they tend to be one to several months, depending on the jurisdiction. An employer does not need to include a probationary period in an Employment Agreement.

Additionally, the applicable Employment Standards legislation provides employers with guidelines on a province-by-province basis for probationary periods, typically establishing three months. During these three months, if an employee or employer choses to end the employment relationship, no notice is required.

If an employer chooses to extend the probationary period past the legislative amount (to say, six months instead of three) the employer/employee must provide notice of termination/resignation as per the applicable Employment Standards law. This ensures employers cannot escape their duties to employees at termination by continuously extending the probationary period.

What happens if an employee breaches an employment contract?

Disputes over employment contracts most commonly stem from the termination provision and concern what a terminated employee is entitled to upon dismissal.

If an employee breaches a term in an employment contract and that breach has caused damage, a court may award damages, but only if a contract is properly drafted. A court may also award specific performance, which orders the party in breach to fulfill its contractual obligations. Courts can also order an injunction against the breaching party to force them to stop an ongoing breach of contract.

Are employment contracts legally binding in Canada?

To be legally binding, an employment contract must be formed by offer, acceptance and consideration. To be enforceable, the contract must fulfill the essential elements of a binding contract at common law, and must not contravene any applicable legislation.

Are you looking for more information on employment contracts?

Our experts can tailor contracts to fulfill the specific needs of your business and industry. We’ll help identify any potential issues with the wording of your policies and ensure you are compliant with legislation. To learn more about how our HR outsourcing services can benefit your business, call an expert today at 1 (833) 247-3652.