Are Employment Contracts Negotiable?

Are the terms of employment contracts negotiable?  More often than not, the answer is yes.  But it amazes me how many people tell me that they assumed that the proposed employment contract was simply a “standard form” agreement and just signed it – even when accepting fairly high level positions.

In other posts, I have looked at the types of clauses that can be used in employment contracts and what they really mean.  You can find the most recent discussion here.

But I wanted to consider some more practical points.  Some might seem obvious.  But people holding a new job offer in hand don’t always think of everything that should be considered.  While you may be anxious to sign the employment contract and start the new job, especially if you have been out of work for some period of time, you really do need to look at the contact closely.  Not all of the terms are written in stone.

What items can be negotiated?

1. Salary.  Well, of course this is not really a legal point.  But most people realize that salary is negotiable.  So I often have employees tell me that they negotiated up the salary level of a new position – but ignored everything else in the contract.  Don’t assume that the salary is fixed.  There may well be room to improve it.  Most of the time, it can’t hurt to try.

2. Vacation and Bonus.  In a sense, these benefits go hand in hand with salary.  They are tangible items that an employer might agree to increase.  Often, both items are subject to a grid or a plan.  But I regularly see employers making agreements to increase vacation time at the request of a new hire – especially from two to three weeks or from three to four.

3. Severance.  This is crucial.  Even though it might seem like the last thing on the mind of someone who is about to be hired, it can be incredibly significant.  Some employers will use clauses that drastically limit the amount of potential severance to be paid on a dismissal.  Any clauses that say “employment standards legislation” or something similar should be questioned and considered.  They might even be deal breaking clauses.  As a result, employers will often negotiate these clauses.  If they will not, you should get proper legal advice so that you understand the implications of signing away such important and monetarily valuable rights.

4. Non-Competition Agreements: People generally realize that these clauses are significant, even if they have not had legal advice.  But I often hear employees telling me that a friend or family member told them not to worry because these clauses are rarely enforced and may not even be enforceable.  While that advice might be true sometimes, it is not always the case.  Signing a non-competition agreement – or even a “non-solicitation” agreement can greatly impact your future opportunities after leaving this new employer.  These clauses are also often negotiable, particularly the proposed time period of the restrictions.

5. Probation and Benefits Clauses.  Believe it or not, these too are negotiable items.  If an employee is being recruited from another position, the potential employer may agree to waive a probationary period and/or start benefits right away.  Sometimes a signing bonus can even be negotiated.

These are just a few of the points to consider.  Competent legal counsel can often point out a number of different clauses in a proposed employment contract that are problematic or that should be considered very carefully.  It may well be much cheaper, in the long run, to go through an employment contract review process at the outset than a legal battle at the end of a relationship.  It is usually far worse to find out, after being dismissed, that a signed employment agreement has now left you with below-market severance, enforceable post-employment restriction and no real legal alternatives.

If the employer is reasonable and is genuinely interested in treating its employees fairly, it should be prepared to negotiate reasonable provisions in all of these areas and maybe some others as well.

 

 

Signing an Employment Contract in Canada? Points to Consider.

Congratulations!  YoConract Signingu have made it through the interview process and have now  been given an employment contract.  The contract may contain terms that significantly alter your legal rights.  Don’t assume that the document is a “standard form” or that it is non-negotiable.  You should consider the terms carefully.  You may consider getting legal advice to have it reviewed properly.  Here are some things to consider before signing:

1.  Termination Clause:  In Canada, this is the number one item to watch for.  If  there is no termination clause, you will generally be entitled to common law “reasonable notice” on dismissal.  This can be in the range of one month per year of service and can often be much more than that.  Under Canadian law, employers can use termination clauses to limit the amount of compensation you might get in the event of a dismissal.  Employers can provide that they are paying as little as the minimum amounts under the applicable employment standards legislation.  With proper wording, they can exclude common law amounts.  If you sign a clause like this, it may be enforceable.  This could end up costing you thousands of dollars.  These clauses are often negotiable.  If the employer will not negotiate, this type of clause could be a deal-breaker for some people, especially those with other options.  Ideally, a Canadian employment contract should simply state that in the event of dismissal, you will be provided with notice and/or compensation in accordance with common law.  Beware of any reference to the Employment Standards Act in a termination clause.

2.  Post Employment Restrictions:  This is the second most important reason employers use written employment contracts in Canada.  If there are no post-employment restrictions, you are generally free to work wherever you like, with whomever you like after you leave a workplace.  Employers often include non-solicitation clauses (of clients or employees), non-competition clauses and confidentiality clauses in their agreements.  Some of these clauses may be enforceable.  They may also make it very difficult for you to find alternate employment later on, even if the enforceability of the clause is uncertain.  These clauses are often negotiable.  Be very wary of extensive non-solicitation, non-competition or other similar clauses.

3.  Probation:  Contrary to what most people believe, there is no “standard” or automatic probation term.  Although probation is referenced in the Ontario Employment Standards Act, for example, this type of clause is not automatic.  If you are leaving other employment to accept a position – and even if you are not, you may be able to get the employer to delete the probation clause.    You may also be able to get the employer to start your health and medical benefits immediately without a probationary period.

4. Compensation:  It goes without saying that the various components of your income should be set out clearly- including salary, bonus, car allowance, pension or RRSP contributions, stock options or share grants and any other amounts that have been discussed.  Employees can often negotiate a signing bonus, particularly if you found the position directly or if you are leaving other employment to accept this role.  If the terms of a plan (for example, a bonus plan or a commission plan) are vague or not provided, you should consider requesting further information or even some guarantees for the first year or two.  Vacation and sick days should also be specified.  Vacation time is often negotiable.

5.  Role and Responsibilities:  The position should be described in sufficient detail, ideally with a job description attached as an appendix, if appropriate. Watch for language in the employment contract that would permit the employer to change your position, job location, hours of work or other key employment terms with minimal or no notice.  These clauses may be enforceable and could alter your legal rights.

6.  Lay-Off:  Some employers include a clause that states that the employer can put its employees on a “lay-off” in the even of a work slowdown, without advance notice or compensation.  These clauses may be legally enforceable and may alter your common law rights.

7.   Entire Agreement Clause:  Many employment contracts in Canada contain an “entire agreement” clause.  This clause means that any promises that may have been made to you must be included in the employment contract or they will become worthless.  If the employer has said anything about future salary increases, bonus amounts, promotions, benefits, or other terms, make sure that these promises are included in the written employment contract.  Otherwise, these promises will become worthless.

8.  Jurisdiction:  Generally this is not an issue.  If you are working in Ontario, for example, you should expect that the employment contract will reference Ontario law and will confirm that Ontario courts have jurisdiction over any issues.  However, some employers do try to transfer the jurisdiction, especially if they think they will more likely to get an injunction in a non-competition case in another location (i.e. somewhere in the U.S….).  While these clauses may not necessarily stand up in court, they can create complications.  Employers may sometimes include mandatory arbitration clauses, which have the effect of ousting the jurisdiction of the courts.  These clauses should also be considered carefully.

Conclusion

In Canada, employment law is reasonably favourable to employees.  Many employment terms are “implied,” which means that they are deemed to be part of your employment contract even if they are not in writing.  Most employees would be best off with a simple offer letter confirming the start date, the job responsibilities and the salary and compensation arrangements.

Of course, the flip side is true for employers, who are generally much better off with a more detailed employment contract.  If you are provided with an extensive employment contract containing numerous terms that limit or affect your common law rights, this may be an ominous sign of things to come.  See how flexible the employer is about negotiating these terms.  Speak to current or past employees about how the workplace is actually run and managed.  In some cases, the position may seem like such a great opportunity that you are prepared to overlook all of the problematic terms of the employment contract.  Ultimately, that is a business decision that you have to make based on your personal circumstances.  But you should make that decision only once you are fully informed about the impact of these different contract clauses.

 

Non-Competition Agreements Enforceable When Commercial: SCC

When will Canadian courts enforce non-competition agreements?  The latest Supreme Court of Canada decision in Payette v. Guay Inc. confirms that, in a commercial context, even wide-ranging, lengthy non-competition agreements may be enforceable.

Guay Inc. is a crane rental company.  It purchased a group of crane companies from Payette and his partner for $26 million.  To assist with the transition, Payette and his partner agreed to employment contacts, that contained five year non-solicit and non-competition agreements.  Four years later, Payette was dismissed by Guay and paid an agreed upon sum.  Shortly after that, he began working with a competing crane company and promptly hired seven former employees away from Guay.

Guay brought an application for an injunction to enforce the five year non-competition agreement and the five year non-solicitation agreement.  The Quebec Superior Court dismissed the application.  It held that the non-competition clause was overly brought since it sought to prevent Payette from working anywhere in Quebec, even though the business that had been sold had only operated in the Montreal area.

The Quebec Court of Appeal overturned the lower court ruling and imposed a permanent injunction against Payette.  It held that since the non-competition agreement arose from a commercial contract, its purpose was to protect the assets that Payette had sold to Guay.  The Court of Appel was therefore prepared to uphold a broad geographic scope and time period.  Payette appealed to the Supreme Court of Canada.

The Supreme Court released its decision on September 12, 2013.  It upheld the Quebec Court of Appeal decision.  It emphasized that there is a big difference between the enforceability of a non-competition agreement in an employment context versus in a commercial context.  The Court noted that there is an imbalance of bargaining power in most employment contract situations, which is a factor to be considered when assessing a non-competition agreement.  In a commercial context, however, there is deemed to be much less, if any, of a power imbalance.  The Court went on to say that “in a commercial context, a restrictive covenant is lawful unless it can be established on a balance of probabilities that its scope is unreasonable.”  The Court noted that factors to be considered should include “the sale price, the nature of the business’ activities, the parties experience and expertise and the fact that the parties had access to legal counsel and other professionals.”

Given all of these factors, including in particular the specialized nature of the business, five years was not viewed as unreasonable, especially since Payette was paid $26 million.  Further, even though the scope of the agreement might cover areas in which Guay did not operate, this was still permissible as Guay could operate in these areas.  The Court also accepted the submission that the non-solicitation agreement did not need a territorial restriction.  The Court emphasizes the need to enforce the intention of the parties and the need to uphold a fairly negotiated commercial arrangement.

In some ways, this case contrasts nicely with Shafron v. KRG Insurance Brokers (Western) Inc., another commercial type case in which the Supreme Court struck out a non-competition agreement that was overly vague.

Looking at these two decisions together and other Supreme Court of Canada cases, it is fair to say that Canadian courts will now be required to make significant efforts to enforce commercial non-competition agreements.  It also seems to fair to conclude that courts will continue to be wary of non-competition agreements in a purely employment context.  The interesting question will be the extent to which courts take this type of “commercially reasonable” approach when dealing with sophisticated executives and senior management personnel.  The emphasis on the assessment of each side’s respective bargaining power may cause courts to become more willing to enforce non-competition agreements where the employer can demonstrate something closer to equality of bargaining power on the part of an employee.

Restrictive Covenant Void – Ontario Court of Appeal

The Ontario Court of Appeal has confirmed once again that restrictive covenants are subject to careful judicial scrutiny, and will often be struck out.  According to the Court’s decision in Martin v. Concrete USL Limited Partnership,   post-employment restrictions that are overly broad or otherwise unreasonable will be struck down and considered void, even where the dismissed employee was a shareholder.

The dismissed employee, Derek Martin,  was a twenty year employee with a minority share in his employer’s business. When the assets of  the business, Concreate USL were sold, Martin received significant compensation.  However, he was required to sign a far-reaching non-competition and non-solicitation agreement.  After later being dismissed, Martin asked the Ontario Superior Court to rule that the restrictive covenants were unreasonable and therefore unenforceable.  The Ontario Superior Court held that the restrictions were reasonable and enforceable in the circumstances.

On appeal, one of the key issues was whether the duration of the agreements was uncertain.  Martin would be bound to certain restrictive covenants as long has he continued to hold shares in the company.  He could not dispose of these shares without the consent of third parties, including lenders and bonding companies with whom he had no connection.  It was therefore, arguably, unclear how long these agreements might remain in place.

A second issue on appeal related to the overly broad scope of the prohibited activities.  If the restrictions were enforceable, Martin would be prohibited from dealing with numerous potential customers, dealers and agents with whom he had not even had contact while working for Concreate.

Martin was successful with both of these arguments.  The Court of Appeal held that the scope of the restrictions went “far beyond what was properly required to adequately protect the goodwill of the purchased business…”  The unanimous decision of the Court references and relies on its prior decision from 2011 in Mason v. Chem-Trend Limited Partnership, in which it had held that it would not enforce an overly broad non-solicitation restriction.

The Court of Appeal noted that Martin had received independent legal advice about the restrictive covenant and he had signed a clause indicating that he agreed it was reasonable.  However, the Court held that it must still scrutinize these types of agreements to determine whether they are in the public interest, even where the situation involves more of a business transaction than an employment contract.

In light of these decisions, employers seeking to impose and enforce restrictive covenants must be extremely careful.  They must ensure that they are only restricting the employee from activities that would affect proprietary interests that they are entitled to protect and nothing more.  As the Ontario Court of Appeal has indicated, employers who overreach will be left with little or no protection from post-employment activities, other than their continued ability to enforce restrictions on the use of their confidential information.

 

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc.

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc.

Can employees be sued successfully when they go to work for the competition?  In some cases, the answer is yes, even the employees do not have enforceable non-competition agreements in place.

In November 2000, a Branch Manager at RBC in Cranbrook, B.C. coordinated a group move where virtually all of the RBC employees went to work for Merrill Lynch in the same town, without giving any notice. Before leaving, they copied RBC records and provided the information to Merrill Lynch. RBC sued.

The B.C. Trial Court held that the employees had breached implied terms of their agreements by failing to give notice of resignation, by breaching duties of confidentiality and by breaching duties of good faith owed to their employer. Significant damages were awarded. Damages for improperly copying information and providing it to Merrill Lynch were awarded by the Trial Court and were not appealed. There is no real legal issue or difficulty with these types of damages. Similarly, damages for failure to give proper notice of resignation were also relatively reasonable and legally supportable. The major issue to be determined by the appellate courts in this case was whether the RBC Branch Manager owed a duty of good faith to RBC and whether the Branch Manager breached that duty by leaving with a number of other employees to go work for Merrill Lynch.

The case was appealed to the Supreme Court of Canada after the B.C. Court of Appeal had lowered or reduced some of the damages that had been awarded at trial.

The majority of the Supreme Court sided with RBC and ordered the defendants liable for five years’ profits. The Supreme Court noted that part of the Branch Manager’s job was to recruit and train staff. By recruiting staff for a competitor, while still working for RBC, he effectively breached the duties of good faith that he owed to RBC. He had coordinated a mass exodus of employees and this was a breach of the obligations that he had to work in the best interests of RBC. The Branch Manager and Merill Lynch were liable for five years’ worth of damages.

Once again, as with Evans v. Teamsters, Justice Abella was the lone dissenting judge from this harsh majority decision. In an angry but carefully argued and legally logical dissent, Justice Abella focused the discussion on whether or not the Branch Manager had breached any legally recognized duty of good faith owed to his employer and if so how the damages should be calculated.

Justice Abella noted that historically, employees have generally only been found liable if they have competed with their employer while working or if they have improperly used confidential information. In this case, there was an award for the improper use of confidential information – including a punitive damages award. This award was not contested and should have resolved one of the issues.

Factually, there was no finding that the Branch Manager had competed unfairly while still working with RBC so there was no basis for an award on this issue.

The major dispute was over the issue of an implied duty of good faith owed by the Branch Manager to RBC. As Justice Abella pointed out, the Branch Manager and the other employees had not signed any restrictive covenants. In fact, during the trial, RBC representatives had expressly stated that they had not asked the employees to sign restrictive covenants when they were hired because it would make recruiting difficult. Under Canadian law, the Branch Manager and the other employees therefore should have been free to leave and work elsewhere unless they breached a duty of confidentiality or some other duty when leaving.

According to Justice Abella, RBC was asking the Supreme Court to provide it with greater protection than it had tried to obtain from its employees when they were first hired. All Court levels had agreed that these were not “fiduciary employees” and would not be subjected, under Canadian law, to heightened duties of fiduciary employees. As a result, in normal circumstances, any one of the employees could have left to go and work for a competitor with little concern. But here the Supreme Court of Canada still imposed a duty of “good faith” on the Branch Manager – even though he was not a fiduciary and had not signed a restrictive covenant.

In responding to the majority decision, Justice Abella angrily points out that employees in Canada are not “indentured servants”. They should be free to move freely from one workplace to another unless they signed a reasonable, legally enforceable restrictive covenant when they first started working for the employer.

The trend for a number of years from appellate court decisions across Canada has been to make it increasingly difficult for employers to restrict the movement of employees from one workplace to another. While courts have been willing to go to extraordinary lengths to protect confidential information, they have generally been unwilling to sustain unnecessary restrictions on employees that prevent them from moving around.

This majority decision opens up a range of claims for employers. Even without signed non-solicitation or signed non-competition agreements, employers may now sue departing employees and argue that they have breached duties of good faith – simply by going to work for competitors. The decision is potentially far reaching and is likely to lead to significant litigation brought by employers against former employees.

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