What Should Employers Include in an Employment Contract?

Written by Ingrid Kao| Queen’s Venture Law Society

Editors: Raenaud Tiwari| Queen’s Venture Law Society, Sheila Gu| Tomi Adebiyi| Queen’s Business Law Clinic

Martha runs a very successful home-based bakery known as “Martha’s Kitchen”. Her clientele has steadily increased over the years. These days, Martha finds herself turning away client orders because she is always fully booked.  In fact, she has had to ask her niece, Mary, who is currently completing her culinary skills training at St. Lawrence College to help her out with some of her recent orders. What Martha discovered, when she had Mary’s help, was that she had capacity to take on more orders which meant more profit for her business, as well as the ability to keep her long-standing, loyal customers happy. Martha is considering hiring Mary as a part-time employee for now, and then as a full-time employee upon completion of her studies. Martha discusses this issue with her friend, Mandy, a lawyer with a small family law practice in Kingston. Mandy has advised Martha to get an employment contract prepared, but Martha does not understand why she needs a contract at all (after all, Mary is her niece and family is everything) and what terms the employment contract should contain. Martha has now approached the Queen’s Business Law Clinic for some advice on putting together her employment contract with Mary.

This is a very common scenario which plays out with many of the small businesses that make up QBLC’s clientele. Many clients wonder why there is a need for an employment contract in the first place. Having an employment contract is of immense benefit for both the employers and the employees.

First, it expressly creates an employment relationship between the parties with specific terms and conditions set out. In the absence of an employment contract, an implied employment relationship is created and such relationship is governed by the common law and employment law legislations such as the Employment Standards Act and the Ontario Human Rights Code^[1]

Second, a good contract can help employers plan their budget costs, regulate employee conduct and state employment duration. Terms such as how much the employee would be paid, employee’s duties, hours of work, overtime hours (where applicable), vacation days etc. can be negotiated and set out in the employment contract.

Third, employees can use a good contract to protect their employment rights ensuring that they are not subjected to just the common law principles regulating the employment relationship and the Employment Standards Act (Ontario).^[2]

Four, the employment contract helps prevent ambiguity. It is important to write the contract in clear language, avoid inconsistency and define all terms. This clarity helps preserve the personal relationships which small business owners have with their employees to whom they are, more often than not, related.

Five, the parties are able to clearly stipulate terms such as the reasonable notice period, confidentiality, non-solicitation and non-competition provisions, among other terms.

There are five elements of a good employment contract which are discussed below:

1. Term of Employment

A good employment contract must clearly state the start and end date of the employment (if available) and the date the contract comes into effect. This section can include a probation period clause if applicable. The contract term can be fixed or indefinite. Fixed terms of employment are for temporary or contract employment where the job ends on a particular date, and the termination is automatic upon expiry of the agreed upon terms. Indefinite terms of employment are for open-ended employment where the job lasts until (i) the employer decides to terminate it, (ii) the employee resigns or (iii) when the employer-employee relationship is frustrated.^[3]

2. Duties/Work

A good employment contract must include a detailed job description that clarifies the role, duties, name of reporting manager/supervisor, expectations, hours and work locations.^[4]

3. Probationary period

The employment contract should also stipulate whether the employee is subject to a probationary period, and the length of the probationary period. A probationary period is a period within the employment relationship where an employer can terminate the employment relationship without notice or payment in lieu of notice. Generally, this period may be a three or six months period, although in some cases, you may find a one year probationary period. In Ontario, an employer must include a probationary period expressly in an employment contract, and the employee must expressly agree, before it can be relied upon by the employer.  A probationary clause must be properly drafted – it must not be unclear and ambiguous. It must also be brought to the attention of the employee at the time of hire.

4. Compensation Benefits

The total compensation package must be clearly stated in the employment contract.

Salary

The total amount, currency, frequency and form of payment of the salary must be clearly stipulated in the contract. The pay should be at least minimum wage unless the employment relationship falls within any of the exemptions set out in section 23.1 of the Employment Standards Act. For example, employees that serve liquor would make less than minimum wage.[5] The compensation can also be made through the issuance of shares or stocks to the employee in the company, where the business is a corporation.^[6]

Overtime Pay

Overtime pay must be paid to an employee who works more than 44 hours in a single week. This is a statutory requirement. It cannot be contracted out of by the parties. The rate for overtime pay is 1.5 “time and a half” of the hourly rate unless the employment relationship is one that falls within one of the exemptions set out in sections 2 and 8 of Regulation 285/01 of the Employment Standards Act.^[7]

The contract must also clearly state whether the employee can “bank” his or her overtime hours instead of being paid for the time. This may be a better, pocket-friendly option for a small business. “Banked or time off in lieu” overtime allows an employee to receive 1.5 hours of paid time off for all the hours worked in excess of the 44 hours worked, subject to satisfying the following conditions:

• There must be a written agreement between the employer and employee stipulating that the employee can “bank” their overtime;
• The employee must take the paid time off within three months of spending the overtime hours or, if the employee agrees in writing, within a year of that work week.

Note that the employee will be able to receive overtime pay for all banked overtime in the event that the employment relationship ends before they are able to take the banked time. This payment must be made to the employee no later than seven days after the employment ends, or the next employee’s pay day.

Promotion/Bonuses

The employment contract must state whether the employee will be entitled to a promotion to a higher position in the future, and the basis for making this assessment, and also whether the employee would be considered for bonuses at the end of each year.

Benefits

State all employment benefits and define what the employee is entitled to, who is allowed to use the benefits, conditions for entitlement, the payer of benefits, start and end date, and the right to change or cancel the benefits.^[8]

5. Vacation

Employees are entitled to vacation with pay or vacation pay if employed for 13 weeks or more. The contract should clearly state any additional vacation time and pay to the Employment Standards Act.^[9]

Vacation Pay

If the employment period is less than 5 years, the vacation pay should be 4% of wages earned during a 12 months period. If the employment period is more than 5 years, the vacation pay should be 6% of the wages earned during a 12 months period.^[10]

Vacation

If the employment period is less than 5 years, the employee should get at least 2 weeks of vacation time per year. If the employment period is more than 5 years, the employee should get at least 3 weeks of vacation time per year.^[11]

6. Termination/Leave

Each Canadian jurisdiction has a minimum notice of termination qualification period. Employers in Ontario must give written notice to terminate an employment contract for employees employed for three months or more unless there is a termination notice clause in the agreement that states otherwise. A general rule of thumb is that at least a 1 week notice should be given to employment less than 1 year, 2 weeks-notice for employment between 1-3 years and 3 weeks-notice for employment between 3-4 year and so on.[12] The employer should consider other factors such as employee age, the character of employment, and availability of similar jobs before giving termination notice. Employees must provide notice of resignation for a minimum of 2 weeks before leaving.^[13] Instead of working the notice period, employers can choose to pay their employees an amount equal to the wages and benefits that the employee would have received had they worked the statutory notice period (termination pay).[14]

In conclusion, the importance of having an employment contract cannot be overemphasized – it is a great way to protect both the employee and the employer’s interests. The QBLC will be happy to provide free legal services to qualified clients seeking to get employment advice for their businesses.

 

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