Employment Contracts - Are They Worth It?

(November 1999)

by Del Elgersma

With increasing payroll taxes and new human rights and employment standards regulations, it's not easy being an employer these days. Making matters worse, whenever there is a dismissal, there is a risk that the former employee will sue. Recent court awards indicate that employers can be liable for substantial damages.

In one recent BC case, a jury ordered an employer to pay over $100,000 to a junior sales representative who was dismissed after 10 weeks of employment. Although the Court of Appeal reduced the award to $41,000, the case still illustrates the potential dangers for employers when dismissing employees.

The employee in this case was fired without any notice. She sued for damages for wrongful dismissal. She also claimed damages for mental distress resulting from being fired and from the way in which she was fired.

The employer was not able to prove that the employee had been fired for just cause. If an employer has just cause, an employee can be dismissed without notice. (Be aware that allegations of just cause are often disputed by employees and can be difficult to prove).

Without just cause, an employer must give an employee reasonable notice of the termination date, or continue to pay the employee's wages for a period of time equal to a reasonable notice period. This is referred to as "pay in lieu of notice". Employees may sue for wrongful dismissal if an employer does not provide reasonable notice or pay in lieu of notice.

In this case the jury found the employer to be guilty of negligent (but not deliberate) infliction of mental distress because of the way the employee was fired. It awarded damages for mental distress of $10,000 and punitive damages of $62,000, as well as damages for wrongful dismissal of $31,000 (about 8 months salary and bonus).

Damages for Wrongful Dismissal

The Court of Appeal upheld the award of damages for wrongful dismissal, although acknowledging that 8 months was at the high end of the scale. The employer argued that one month's notice would have been sufficient given the employee's young age, the junior level of her position, and the short period of her employment, factors which traditionally favour a shorter notice period.

However, the court ruled that other factors supported the longer notice period, including the poor job market in that industry at the time of the dismissal, the length of time it took the employee to find a new job, and the fact that the employer had assured the employee of long term employment.

Damages for Mental Distress

The Court of Appeal confirmed that damages for mental distress cannot be awarded unless the employer's conduct constitutes a cause of action separate from the dismissal itself. An employer does not owe a duty to dismiss an employee in such a way as to reduce any risk of mental suffering. The court reversed the jury's award for punitive damages.

However, applying a 1997 decision of the Supreme Court of Canada, the Court of Appeal held that an employee can be compensated by way of an extended notice period if the employer acts unfairly or in bad faith in the way it dismisses the employee. While the court overturned the jury's award for mental distress of $10,000, it increased the award for failure to give reasonable notice by the same amount (by extending the notice period from 8 months to 11 months). This resulted in a total award of over $40,000.

Employment Contracts

As a result of cases like this one, employers are increasingly using employment contracts to attempt to limit the amount that must be paid to employees that are terminated.

When there is no written agreement, an employer dismissing an employee without cause must give at least the amount of notice required under the Employment Standards Act. The employer is also subject to the common law requirement to give reasonable notice, which generally exceeds the minimum standards imposed by the Employment Standards Act. The reasonable notice required at common law is based on various factors, including those discussed in the above case.

Written employment contracts can limit the amount of notice required. For these provisions to be enforceable, the contractual notice period must be at least equal to the minimum notice required under the Employment Standards Act.

The notice provisions must also be clear and there must be mutual agreement that the contractual notice will be binding. Employers cannot rely on notice provisions unilaterally imposed during the course of employment. The result is that any employer who wishes to contractually limit notice on termination must do so with caution.

While a written agreement provides employers with more protection and certainty, the courts will not always enforce these contracts. This is because the law considers employment to be a unique relationship that is subject to special protection. In addition, many terms of the employment contract are implied by common law. Provincial laws, such as the Human Rights Code and Employment Standards Act, impose other terms.

Employers who decide to prepare written employment agreements should review them and get legal advice. This will increase the chances that the agreements are enforceable, and will reduce the employer's legal and severance costs in the long run. For more information on this or any other employment-related issue, please contact us.