Canada: Focus On Employment, Labour And Pensions - April 2009

Last Updated: May 5 2009

In this issue we discuss (i) Go West: BC Welcomes Skilled Trades and Professionals; (ii) Supreme Court of Canada Confirms that Vague or Unreasonable Restrictive Covenants Should be Struck Down; (iii) Canadian Employers, Foreign Workers and the Current Economic Crisis; and (iv) Terminations and Severence a Recessionary Economy.

Go West: BC Welcomes Skilled Trades and Professionals
By: Andrea Raso Amer

British Columbia has taken the National Agreement on Internal Trade ("AIT") one step further by tabling Bill 9, the Labour Mobility Act. The Bill is the first piece of legislation in Canada which gives barrier-free access to Canadian tradespersons and professionals who want to work in British Columbia.

The AIT was signed in 1994 by the federal government and the governments of the provinces and territories (excluding Nunavut, which remains an observer). The AIT was designed to eliminate barriers to free movement of goods, services, investments and people throughout the country. Chapter 7 of the AIT specifically seeks to remove labour barriers, while allowing each province and territory to maintain responsibility and authority for regulated occupations in its province, including engineers, trades people, doctors and lawyers.

The BC legislature is now making good on its commitment to the AIT within its provincial barriers. Bill 9, which was introduced by the BC Minister of Advanced Education and Labour Market Development, received first reading on March 12, 2009.

Generally, the Bill provides that a worker who holds a certificate, license or registration from a regulatory authority in any of the provinces or territories, may practice the equivalent occupation in BC without having to obtain a BC certificate, license or registration. The worker is permitted to use the title or designation of the BC equivalent, and holds the same rights, restrictions and obligations as if he or she had obtained the designation in BC. The "nuts and bolts" of the system, including the procedure for applying for and granting a BC certification, will be contained in Regulations, yet to be drafted.

The BC Government is predicting that the current number of post-secondary students in BC falls short of the number of expected retirees in the province over the next decade. The Government is therefore counting on this Bill to facilitate and encourage the movement of skilled human resources to the province.

Supreme Court of Canada Confirms that Vague or Unreasonable Restrictive Covenants Should be Struck Down
By: Blair McCreadie

The departure of a key employee to join a competitor is one of the most highly charged and emotional situations faced by an employer, especially where there is a tug of war with the former employee over customers and business opportunities. To combat this problem, many employers will include restrictive covenants in employment agreements with their executives and other key employees to protect their business interests.

But the Supreme Court of Canada recently issued a cautionary note to employers that implement restrictive covenants that are not clear or are unreasonable. In the Shafron v. KRG Insurance Brokers (Western) Inc. decision, the Court considered whether the doctrine of severance could be invoked to either resolve an ambiguous term in a restrictive covenant or fix an unreasonable restrictive covenant.

Unfortunately for employers, the Supreme Court of Canada confirmed that when faced with a restrictive covenant that is ambiguous or over-reaching, the proper remedy is to strike it down. The Court concluded that notional severance (which means "reading down" a contractual provision to make it legal and enforceable) is not an appropriate mechanism to cure a defective restrictive covenant. It also found that blue pencil severance (which means removing part of a contractual provision) could only be used in exceptional circumstances.

Mr. Shafron sold his insurance brokerage to KRG in 1987, but remained employed in the business. Shafron did not agree to any restrictive covenants as part of his sale of business agreement with KRG. However, Shafron subsequently entered into a series of employment agreements with KRG in which he agreed that he would not be employed in any insurance brokerage within the "Metropolitan City of Vancouver" for a period of three years after leaving his employment for any reason other than termination without cause. Although another entity acquired the shares of KRG in 1991, the restrictive covenant in Shafron's employment agreement remained essentially identical.

In 2001, Shafron left KRG to join another insurance brokerage in Richmond, British Columbia. KRG commenced an action to enforce the restrictive covenant. The trial judge dismissed the action in part because the geographic restriction was ambiguous and unclear. However, the BC Court of Appeal overturned the lower court's decision, and enforced the restrictive covenant. The BC Court of Appeal agreed that the term "Metropolitan City of Vancouver" was ambiguous; however, it argued that this term could be construed to mean "the City of Vancouver, the University of British Columbia endowment land, Richmond and Burnaby."

The Supreme Court of Canada unanimously found that the BC Court of Appeal erred by re-writing the geographic restriction in Shafron's employment agreement. It stated that courts should not assist employers seeking to rely upon vague or ambiguous restrictive covenants in employment agreements by reading down or re-writing language into something that could be enforceable. The Court also expressed concern that applying notional severance would invite employers to draft over-broad restrictive covenants in employment agreements.

It held that a court should not re-write a vague or over-reaching covenant to reflect its own view of what would be reasonable in the circumstances or what the parties originally wanted. The Court reaffirmed that the proper remedy is generally to declare the ambiguous restrictive covenant to be void and unenforceable. However, the Court did allow that a decision-maker could, in very limited circumstances, "blue pencil" or remove wording in an employment agreement that is "clearly severable, trivial and not part of the main purport of the restrictive covenant."

The Supreme Court of Canada did draw a distinction between restrictive covenants that are negotiated as a term and condition of employment, and those that are included as part of a sale of business agreement. Because of the potential power imbalance between employer and employee, the Court recognized that restrictive covenants in an employment agreement should receive more rigorous scrutiny. However, a purchaser or employer will be given more latitude by the courts where a restrictive covenant is contained in a sale of business agreement, and the purchaser has compensated the vendor or employee in exchange for his or her promise not to compete.

So what does the Shafron decision mean for employers and for potential purchasers in a business acquisition? First, a purchaser who wants to protect its business interests from the vendor following an acquisition should expressly link those restrictive covenants to the agreement of purchase and sale. Second, an employer must draft clear language when defining the scope of business, geography and time period in a restrictive covenant. Third, the restrictive covenant should be specifically tailored to the business activity, time period and geographic area where the departing employee could harm the employer's interests.

The courts will continue to recognize a delicate balance between the right of an employer to protect its business, and the right of a departing employee not to be unduly restrained following the termination of employment. However, the Shafron decision re-emphasizes the need for employers to implement clear and well-drafted restrictive covenants when hiring key employees, rather than relying on the courts in response to an untimely and potentially damaging resignation.

Canadian Employers, Foreign Workers and the Current Economic Crisis
By: Evelyn L. Ackah

During times of economic growth, Canadian employers have actively recruited foreign workers to assume temporary or permanent employment in Canada. However, with the recent economic downturn, many Canadian employers are now faced with the unfortunate task of cutting costs and reducing personnel. While employer obligations with respect to the dismissal of Canadian employees are well-established, what obligations are imposed on Canadian employers with respect to the foreign workers they have recruited and relocated to Canada?

Employers' Obligations to Foreign Workers Upon Termination

Every province across Canada has legislation that governs the termination process and ensures human rights are protected. In Alberta, for example, the Employment Standards Code governs the relationship between employers and employees, including temporary foreign workers. Employers who dismiss foreign workers must abide by the same notice provisions that are applicable to Canadian workers. They must also not run afoul of human rights legislation. In Alberta, for example, employers must also abide by the Human Rights, Citizenship and Multiculturalism Act, which prohibits employers from discriminating against any employee. Each province has similar employee protection legislation.

When dismissing foreign workers, employers must abide by employment legislation and provide adequate notice or payment in lieu of notice. When a temporary foreign worker is dismissed by a Canadian employer, he is eligible to remain in Canada until the expiration date of his current work permit. However, the foreign worker cannot work for another Canadian employer without first obtaining a new work permit - either by way of Labour Market Opinion ("LMO") approval from Service Canada or an exemption category under the Immigration and Refugee Protection Act.

Unlike with skilled workers, employers who enter employment contracts with low-skilled workers pursuant to the Service Canada Low-Skilled Worker Program are contractually obligated to pay for the employee's travel to and from Canada. Therefore, an employer who dismisses a low-skilled foreign worker will still be contractually bound to pay the travel expenses for the employee to return to his country of origin.

Foreign workers on work permits laid off first

Over the past couple of years, Service Canada has begun to include specific instructions for employers when approving LMO confirmations. Generally speaking, these instructions indicate that if the employer is forced to lay off employees that are in the same job category, the foreign workers in that job category should be dismissed before any Canadians or permanent residents of Canada are dismissed. Employers should be sure to check any LMO approvals they may have received from Service Canada to ensure they comply with these instructions when faced with terminations. Although Service Canada has no direct recourse if an employer chooses to disobey the layoff instructions outlined in the LMO approval, it will certainly make it more challenging for the employer to obtain future LMO approvals in the future once the economy rebounds and the need for foreign workers increases again.

If an employer dismisses a foreign worker, we would recommend notifying Citizenship and Immigration Canada of the termination in order to ensure there is no possibility of misuse or fraud of the Canadian work permit held by the foreign worker, however, the employer is not obligated to.

Employment Insurance Benefits

Canadian employment insurance benefits may be collected by foreign workers who are dismissed by their Canadian employers and remain temporarily in Canada seeking new employment. In order to qualify, the employee must be unemployed, have a valid work permit and meet eligibility criteria, such as minimum hours worked.

Canadian employment insurance benefits may be collected by foreign workers who are dismissed by their Canadian employers and remain temporarily in Canada seeking new employment. In order to qualify, the employee must be unemployed, have a valid work permit and meet eligibility criteria, such as minimum hours worked.

Effect of Dismissal on Permanent Residence Status

Employers who nominate foreign workers for permanent residence status through a provincial nomination program ("PNP") have an obligation to notify the PNP office of the change in employment status of the worker. Depending on how far along the employee is in the nomination process, the unfortunate result could be that the foreign worker would no longer be eligible for permanent residence as a provincial nominee.

The termination of the temporary foreign worker's employment contract may or may not affect eligibility for permanent residence for those temporary foreign workers who have had their provincial nomination approval forwarded to a Canadian consulate for final processing. Depending at what point the consulate is processing the permanent residence application when the dismissal occurs, the consulate will likely review each case individually and decide how to proceed. Generally, if the applicant would have qualified anyway for permanent residence as a skilled worker (without the nomination), then it is likely the application for permanent residence will proceed, but it is at the discretion of the consular officer.

Temporary foreign workers with at least two years of full-time (or equivalent) skilled work experience in Canada can apply for permanent residence through the new Canadian Experience Class. Presumably, a temporary foreign worker whose employment contract has been terminated can still apply for permanent residence through this class, provided he or she meets the eligibility requirements, and applies within one year of leaving the Canadian employer.

It is unfortunate that due to the current economic situation, employers may be forced to dismiss or lay off employees. So long as Canadian employers are aware of their obligations to all employees, including foreign worker employees, they can make the best decisions to meet their business needs.

Terminations and Severance a Recessionary Economy
By: Will Cascadden

In the Greek myth of Sisyphus, the former king is doomed to spend all eternity pushing a rock up a hill only to have it roll back to the bottom each time he gets it to the top. The human resources world currently appears to be living an existence much like that of Sisyphus. Over the past five or so years, most human resources departments have been focused largely on recruiting employees, and few would argue that there has been a plethora of suitable (or any) candidates to choose from. Recruitment was like Sisyphus' rock being shoved up the hill. It is a thankless task for which recruiters generally received nothing but grief.

It appears that the profession has pushed the rock to the top, because in the last few weeks or months, human resources personnel from nearly every major industry in Calgary have woken up one morning to find the rock rolling wildly back down the hill. Companies are dismissing and laying off employees with increasing frequency and in increasing numbers, and all of the other problems that come along with a poor economy are making sudden and dramatic appearances.

When employers needed more people, human resources departments and leaders turned their attention to recruitment. Now, when employers have decided that they need fewer employees, the human resources world has no choice but to focus on layoffs, dismissals and other "right-sizing" exercises.

One of the changing realities brought about by the "new economy" relates to terminations and severances. Employees that were dismissed a year or so ago were released into a world in which there were a number of other opportunities available. Often, terminated employees could walk out one door with a severance cheque in hand, and almost immediately walk through the door of their new employer. The effect was that the severance payment was not needed to tide the employee over until he or she found the next position. The money was a bonus that could be invested or used to pay down debt.

In such circumstances, an employer could knowingly or unknowingly be less generous with severance proposals than perhaps the law of reasonable notice would dictate. Employees were likely to accept such payments without fuss knowing they were going to be able to work elsewhere as soon as they wished.

This is no longer the case. In the current economy, employees receiving severances are almost certainly going to be of the view that finding new employment will take time and that the severance proposal is needed to cover the costs of surviving that interim period. As a result, dismissed employees are almost certainly going to consider a severance proposal much more critically than they would have a year ago. They are more likely to get legal advice, and they are more likely to push back if the figure is not considered to be sufficient. Indeed, even reasonable and generous severances may generate demands for more from particularly aggressive former employees (or from former employees with particularly aggressive legal counsel).

Employers, therefore, need to review their methodology (if any) of setting severance amounts. If severance offers are too low, an employer is much more likely to find itself facing demands for greater severances, and a disproportionate number of wrongful dismissal suits. Furthermore, if an employer develops a practice of starting with "lowball" severance packages and then negotiating up, that employer will develop a reputation for being willing to raise severances when pushed. The result of having that reputation is, of course, increased pushback from dismissed employees - even if the employer subsequently changes its practice in setting severance amounts.

Now is the time for employers to review their methods for setting severances in order to ensure that they are making offers that are in the reasonable range. There are a number of methods for determining how much severance should be offered to an employee. Some employers use a formula to determine this, others have legal counsel review each proposed dismissal to determine the severance in the basis of the law of reasonable notice, and some rely on employment agreements that establish severance entitlements based on the agreement of the employer and the employee. Whatever method is used, employers should be sure that they are confident that the method is effective. If unsure, employers should have such policies or practices reviewed critically before utilizing them.


Upcoming Seminar:

Employment | Labour Seminar, Vancouver, April 29

  • Bonuses, Benefits and Bail-Outs: Constructive Dismissal in the 2009 Paradigm
  • High Maintenance - Low Production: How to Manage Difficult Employees
  • Tough Decisions: Reducing Labour Costs to Meet the Difficult Economic Environment

Recent Seminars:

Employment | Labour Seminar, Toronto, April 22

  • Workplace Investigation Basics – Bright Lights and Water Boarding Not Required
  • Making a Medical Breakthrough – How to Get More than a One-Line Medical Note from your Absent Employee
  • Weathering the Storm – Managing in a Distressed Economy

Employment and Business Immigration Seminar, Calgary, April 8

  • Practical HR Issues that Arise During a Downturn
  • Termination and Severance Proposals
  • Special Considerations for Group Terminations
  • Immigration and Obligations to Temporary Foreign Workers' Alternative Restructuring Strategies - Temporary Layoffs, Benefits/Wage Restructuring and Other Cost-Savings Measures

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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