Canada: The Importance Of Written Employment Contracts

Last Updated: September 18 2008
Article by Gary Catherwood

The Supreme Court of Canada (SCC) has written about the importance of work in our society1 in several leading employment cases over the past few years. Its analyses conclude that because employment is so important in terms of an individual's status and self-worth, the contract of employment (while a contract and thus subject to the laws governing contracts) is also deserving of special treatment. Accordingly, the SCC has endeavored to balance what it obviously views as the disparity of power between an employee and an employer. This view has given rise to what many perceive as the pre-disposition of the courts to "make the employer pay".


This approach is easily demonstrated in the determination of the reasonable notice period. The 24-month ceiling originally reserved for those with extended periods of service (mostly senior employees at the highest end of the scale) is now not infrequently ordered for former employees with significantly less service. Further, the curve is often adjusted to award more than proportional damages to shorter-term former employees. Former employees with relatively short terms of service are typically awarded damages based on quite disproportionate notice periods.

Dishonesty and/or theft – once considered slam-dunk causes for dismissal – now require a more contextual and proportional approach.2 Theft or dishonesty may not be cause for dismissal. At the same time, the courts cling to the conclusion that there is no principle such as 'near cause' which might reduce the notice period. Nor is there a right to impose lesser discipline by way of a period of unpaid suspension. The employee's action or inaction is either cause or not cause for dismissal and the location of the goalposts is often not clear.

Most employers have become familiar with the 'Wallace bump'. This is the amount awarded to former employees who, at the time of dismissal, were not treated fairly by the employer. In the precedent-setting Wallace case3, the SCC refused to recognize a duty of good faith restricting the right of an employer to decide to terminate the employment. The court did conclude, however, that when an employer acted in a high-handed or callous manner at the time of dismissal (such as wrongly alleging cause or not being straightforward and honest about the reason for dismissal), the employee should be compensated by way of an extra period of notice. Notably, the SCC has recently gone out of its way to observe in passing that this extra award is not subject to mitigation.4 In the very recent Keays5 decision, the SCC has revisited the awarding of Wallace damages and now appears to accept that Wallace damages are subject to the traditional rules applying to damages in breach of contract cases. Notably, the SCC declared that these damages are to be awarded as a monetary amount; not in terms of an extension of the notice period and only where there is a breach of the duty to act fairly at the time of dismissal and damages are proven to flow from that breach.

In a recent B.C. Court of Appeal case dealing with the enforcement of what many other cases had found were fiduciary obligations, the court observed that if an employer wished to enforce such obligations, it had better make them part of the contract of employment.6

Generally, employers do not have the right to 'lay off' employees. If an employer chooses to lay off, the employer should recognize that the employee may treat the layoff as a dismissal and sue for damages. Further, there is no automatic period of probation; any probationary period must be specified as part of the employment agreement.


Increasingly, the courts are ruling in favour of the employee in these particular employment-related issues. Employers should not leave themselves so vulnerable and should take the necessary steps to protect themselves and their business operations.

Fortunately, the employer has an option other than leaving these issues to the courts. For instance, the employer may insist that certain provisions be part of the contract of employment. In theory, the contract doesn't have to be in writing but in practice the employer will likely need to prove the terms of the employment contract so it is advisable to have them in writing. Ideally, no employee should be hired without a written contract of employment.

There are several provisions that should be included in the employment contract. One fundamental term that employers should include is the probationary period, if one is applicable. There may be situations where the employee is already proven or a known quantity so probation is not suitable but, in the majority of cases, a probationary period should be specified.

A period of notice to terminate the employment should certainly be specified. It must clearly contradict the inference which will otherwise be drawn that, absent cause, reasonable notice is required to lawfully terminate. Further, the agreement should specify that, at the employer's option, the employment may be terminated immediately on payment in lieu of the required or remaining notice. This is not to suggest that the minimal provisions of the Employment Standards Act (ESA) be imposed. In many cases, more generous notice periods or pay in lieu will be appropriate. Earlier cases from trial and provincial courts of appeal had ruled that an additional advantage of the specification of a notice period was that this would render Wallace damages unavailable. The Keays decision appears to have nullified that development.

If layoffs are a possibility, then the right to lay off must be specified and the ESA must be considered.

The right to adjust or amend insured benefits without notice should be specified. The ever-increasing cost of premiums may lead to the conclusion that an adjustment in the coverage is necessary. Insured benefits may be quite important and a unilateral change might otherwise result in a claim of constructive dismissal. By reserving the right to make changes in benefit plans, the issue may be avoided.

Vacation pay may also be a contentious issue. Most often vacation time and pay are not considered separately and vacation is based on years of service without regard to the actual earnings of the employee. This may be a violation of the ESA since vacation pay must be at least the minimal percentage of all earnings. By making vacation pay a set percentage of earnings, the employer will avoid the situation where an employee who has been off work for a lengthy period of time (i.e. legitimate health reasons) may claim to still be entitled to full vacation time off with full pay.

Restrictive covenants are another reason to have a written contract of employment. The courts are reluctant to enforce restrictive covenants but they may be entirely necessary for the reasonable protection of the employer's business. These particular covenants must be no more restrictive than necessary which means actually considering the individual circumstances of the particular employee and not just mechanically applying a "one size fits all" provision.


The employment contract need not be lengthy nor does it need a lot of complicated verbiage. It should cover basic provisions and it must be settled prior to completion of the hiring process. Additionally, the provisions of the ESA must be met. Hiring should be conditional on the employee signing the contract to confirm agreement to the terms offered. Finally, as the employment evolves, the hiring letter should be reviewed and, with regard for the requirement for consideration, changes to the terms should be made as required to reflect the changes in the employment arrangements and the amended hiring letter should be dated and signed.

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1 Slaight Communications V. Davidson, [1989] 1 SCR 1038. Reference re Public Service Employee Relations Act (AD) [1987] 1 SCR 313.

2 McKinley v. BC Tel [2001] 2 SCR 161.

3 Wallace v. UGG Ltd. [1997] 3 SCR 701.

4 Evans v. Teamsters Local 31, 2008 SCC 20.

5 Honda Canada Inc. v. Keays, 2008 SCC 39

6 RBC Dominion v. Merrill Lynch, 2007 BCCA 22.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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