Canada: Employment Law – Doing Business In Canada – Focus On Ontario Part I – Employment And Termination

Last Updated: June 7 2016
Article by Christine Jonathan

Introduction

Employment law in Canada is a complex mix of contract, statute and the common law or, in the case of Québec, civil law. With the exception of federally regulated industries such as banks, telecommunications, railways and airlines, employment law in Canada is provincially regulated. While most provincial employment standards statutes share some common features, foreign employers operating in Canada should be mindful of the differences and ensure that their policies, practices and contracts are compliant with the legislation of the province in which they are operating.

Canadian Courts have made several broad statements regarding the primacy of work in the life of the individual, the inherent imbalance of power between individuals and their employees and the duty that all employers have to administer the employment relationship in good faith. The Courts consistently apply these principles to any litigation between an employer and its former employee and are loathe to enforce agreements that may be perceived to be unfair to employees.

No "At Will" Employment

The most profound difference between Canadian employment law and American employment law is that "At will" employment does not exist in the Canadian employment law context. Canadian law provides that every employee who is terminated without just cause is entitled to notice of termination or pay in lieu of that notice.

Statutory Notice and Severance

In general, an employee's entitlement to notice is derived both from statute and the common law. The applicable provincial and federal employment statutes prescribe only the minimum period of notice or payment in lieu of notice that must be given to a dismissed employee. It is a common and serious mistake to assume that the statutory minimums are the only obligations on the employer in the event of a termination without cause. Statutory minimums usually range from one to eight weeks of notice depending on length of service. In Ontario, employees who work for a company with an annual Ontario payroll in excess of $2.5 million and who have five or more years of service are also entitled to an additional lump-sum payment known as "statutory severance". Such employees can receive an additional 5 to 26 weeks of severance pay. It should also be noted that many provinces require employers to continue all benefits coverage for a period of time following termination.

There may be separate and additional obligations in situations involving the termination of a group of employees, including the obligation to provide additional notice and the obligation to provide advance notice to a specific government department.

Reasonable Notice

In the absence of a contractual stipulation to the contrary, judges will routinely imply an obligation on the employer to provide far more generous notice periods than the minimums prescribed by provincial statutes. The amount of notice to which an employee is entitled is determined with reference to the common law concept of "reasonable notice of termination." Factors that the courts have reviewed in determining what constitutes reasonable notice include:

  • Years of service
  • Seniority within the organization
  • Salary and other compensation
  • Employee's chances of re-employment upon termination
  • Employee's health
  • Employee's education
  • Promises of job security, even if not enforceable at law
  • Whether the employee was enticed from secure employment

There is no set formula for determining reasonable notice of termination but it can be as much as one month per year of service. While there is no recognized cap on notice, it rarely exceeds 24 months. Employers can meet their obligation by providing working notice or pay in lieu of such notice, at their option.

Employees who have been terminated have a duty to mitigate their damages arising from the loss of their job. The obligation to mitigate requires dismissed employees to take reasonable steps to limit their losses, usually by looking for other work. If an employee does not do so a court may reduce the damages that would have otherwise been owed. If the employee is successful in finding other employment, the earnings from mitigation will be deducted from any award otherwise payable by the employer. However, mitigation does not reduce the employer's obligation to provide the statutory minimum notice and, in Ontario, severance, if applicable. A failure to act reasonably in terms of mitigation can also reduce damages.

Provincially regulated employees outside of Québec can contract out of the obligation to provide reasonable notice at law. However, the contract cannot and should not make any effort to contract out of the statutory minimum notice or severance. Where a contract does not comply with the minimum standards in the applicable statute, the offending provision will be considered void. The courts will not simply impose the minimum statutory notice required by the statute, but will order "reasonable notice," which will likely be significantly greater than the notice period the employer intended. Employers should ensure that the contract is carefully drafted and signed by the employee before work begins.

Termination with Cause

If an employer wishes to terminate an employee due to the employee's conduct without providing notice or compensation in lieu, the employer must establish "just cause". This is a heavy onus to discharge in the courts and tribunals in Canada. Effectively, the employer must establish that the employee's conduct amounted to a repudiation of the employment contract. Examples of just cause include serious acts of dishonesty, gross misconduct such as violence or harassment, breach of the duty of confidentiality, persistent neglect of duties or gross insubordination.

Resignation

Employees may resign from their employment. While the law implies a duty to provide reasonable notice, there are very few cases where an employer has been able to obtain redress from the courts or tribunals due to inadequate notice. Successful cases usually involve high-placed executives or professionals, as well as sales representatives responsible for a significant portion of the employer's sales, and are often coupled with serious misconduct, such as theft of a corporate opportunity, flagrant solicitation of clients or misappropriation of employer trade secrets.

Resignation Due to Unilateral Changes to Employment Terms

In the United States, employment terms are generally subject to change or modification "at will". In Canada, an employer cannot unilaterally impose new terms into an employment contract without the employee's consent. This is called constructive dismissal. In order to make changes to the employment contract, an employer is required to provide new consideration, such as a small raise or bonus, or reasonable notice of the change. "Continued employment" is not sufficient consideration in Canada.

In certain cases, employees may resign from their employment on the basis that the employer has made unilateral and fundamental changes to the employment relationship. Examples of constructive dismissal include a significant reduction in pay, changes to the structure of compensation, a relocation outside the normal commuting area or a demotion in the corporate hierarchy (even if pay and job title are grandfathered). In some cases, employees have successfully argued that workplace harassment or discrimination constituted constructive dismissal. An employee who establishes constructive dismissal is able to sue for damages equivalent to the notice the employer would have had to pay upon termination of employment.

Employers contemplating significant changes to an employment relationship should implement strategies to avoid a claim of constructive dismissal, including providing advance notice of any changes. Written contracts of employment may also preserve an employer's right to implement certain types of changes that would otherwise be considered a constructive dismissal.

Confidentiality

All employees have an obligation to keep secret the confidential information of their employers. It is prudent to have a written agreement regarding what constitutes confidential information and to implement procedures to maintain the confidentiality of sensitive information. Courts are prepared to enforce the duty of confidentiality with an injunction, which is akin to a temporary restraining order.

Restrictive Covenants

Restrictive covenants are explicit contractual obligations that survive the termination of employment. American courts are generally more willing to enforce post-employment, non-competition and non-solicitation agreements where the agreement is reasonable in time and scope, and if the agreement is protecting the trade secrets or other proprietary rights of the company.

In Canada, these clauses are usually divided into two categories: non-solicitation and non-competition clauses, but may also include protection of the employer's intellectual property beyond those protections already afforded to employers by common law and statute.

The general rule is that any restrictive covenant must be what is strictly necessary to protect the employer's legitimate interests, must be reasonable and cannot be contrary to public policy.

Courts typically examine reasonableness in terms of duration, scope and geographic limits. The clause must be clear and precise. Courts will generally not "blue-pencil" or redact unenforceable clauses in order to make them enforceable. According to Canadian law, there is a strong public-policy interest in permitting individuals to work freely in the workplace.

Non-solicitation clauses limit the employee's ability to solicit customers or employees. Although the courts generally enforce well-drafted non-solicitation clauses, care must be used to ensure that the scope of the clause is not excessive.

Non-competition provisions are enforceable only in exceptional cases and the onus is on the employer to establish why the non-competition clause is necessary and why a non-solicitation clause is inadequate. Different rules apply, however, if the non-competition clause is part of an overall corporate acquisition, where it can be established that the purchaser required the clause in order to preserve the value of the assets or shares purchased.

In certain cases, courts will enforce a restrictive covenant with an injunction.

(Note: this is the first installment of a five part series on Employment Law. View the full article)

About Mackrell International - Canada - MacDonald Sager Manis LLP is a full service business law firm in Toronto, Ontario and a member of Mackrell International. Mackrell International - Canada is comprised of four independent law firms in Alberta, British Columbia, Ontario and Quebec. Each firm is regionally based and well-connected in our communities, an advantage shared with our clients. With close relations amongst our Canadian member firms, we are committed to working with clients who have legal needs in multiple jurisdictions within Canada.

This article is intended to be an overview and is for informational purposes only.

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