By Howard Levitt and Eduard Matei
The cost of being a spendthrift may not be worth the final bill
We have all seen them: long sprawling agreements, chock full of legalese, that employees are expected to sign. You take one look through a past contract prepared by your legal counsel and think to yourself, “Maybe I can save a few dollars by making the entitlements on termination just a little bit less generous. What could the harm be?”
The unfortunate answer, as many employers have learned, is that it can end up hurting your bottom line far more than if you had sought legal advice.
Generally speaking, when an employee is owed severance, there are three places to look:
- The applicable provincial/federal employment statute — this sets the bare minimum of what they are owed
- The employment contract — this may set a different formula than the legislation and tries to limit employees’ access to common law severance entitlement. Few employment contracts are more generous than what a court would provide. Indeed, the very purpose for most employers in having contracts is to restrict employees’ entitlement; and
- Common law — this is the employee’s ability to sue their employer and have the court dictate how much severance is owed.
Given this disparity between statutory entitlements and entitlements at common law, and the fact that employment contracts can limit entitlement, it is not surprising that employers often try to limit common law claims through an employment contract.
The result has been an escalating war fought in courtrooms between employees’ lawyers trying to find ways to render employment contracts unenforceable, and employers’ lawyers trying shore those holes up for future contracts in accordance with ever new decisions by the courts.
While the number of ways a contract could be voided are far too numerous to list here, a cardinal rule exists — your contract cannot limit an employee’s entitlements on termination to less than the statutory employment standards minimums.
Where an employer does not abide by this cardinal rule, it does not matter how otherwise finely written the contract is, the Supreme Court of Canada has repeatedly held that it will render null and void any contractual limit to employees’ entitlements on termination — and provide access to common law severance.
Importantly, courts have held that even a purely hypothetical breaking of this rule renders the contract unenforceable. For example, consider a contract that states an employee will receive six weeks of severance upon termination. If the employee is terminated when their statutory entitlements amount to only five weeks’ pay, but they would have been entitled to eight weeks had they worked there for three more years, then the contract is unenforceable, even though the scenario remained hypothetical.
While this may seem harsh, the Supreme Court of Canada has found that employers should not be able to rely on contracts that even purport to take away rights from employees, and given the general power imbalance in an employment relationship, courts should err on the side of protecting employees.
Common law severance, although higher than statutory minimums offered by employment legislation, is far from the only cost an employer might be liable for.
Litigation always carries risk, a fact that is true for both employers and employees.
In the recent case of Forbes v Glenmore Printing Ltd., the employee’s contract stated that the employee’s entitlements on termination would be limited to eight weeks — the natural maximum point owed to an employee based on length of service in employment in British Columbia.
However, what Glenmore Printing’s contract failed to consider was that British Columbia’s Employment Standards Act also provides that where large groups of employees are terminated together, as much as an additional 16 weeks would be owed to the employee beyond the severance based on tenure.
In other words, the contract suggests that despite being owed as much as 24 weeks, Forbes would only be entitled to eight under the contract.
While initial review might suggest that the contract was unenforceable on this basis, the British Columbia Supreme Court found otherwise.
While in the short run, this resulted in a victory for the employer, it may well be short-lived as counsel for Forbes has recently filed an appeal to have the matter brought before the British Columbia Court of Appeal, determined that the Court’s decision is not in line with jurisprudence on the issue.
Even if Glenmore Printing ultimately does win there, a few word choices in the contract might have allowed it to sidestep a long and costly battle altogether. Then there is the possible opportunity Forbes may have to take the matter one step further to the Supreme Court of Canada.
For employers, always be wary of saving a few dollars by either being overly parsimonious in setting what your employees entitlements are, or through bypassing legal fees you might incur by having a lawyer review the contract. Lawyers for employees can and will exhaust any and all opportunities to find footholds in your employment contract to the benefit of their clients. The cost of being a spendthrift may not be worth the final bill.
For employees, remember that there are many ways to escape the terms of an employment contract and legal advice is recommended.