The Importance of Having Contracts Before Economic Problems Arise

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Well-drafted employment contracts can be very important in securing the future of your company when economic difficulties arise, i.e. industrial downturn, market shift, loss of a major customer/contract. At this critical juncture, non-unionized companies frequently seek to downsize their workforce, even temporarily, yet are shocked to learn that they are legally unable to take the necessary remedial action without taking a substantial financial hit – that is unless they have previously implemented some basic legal strategies toweather these challenging economic times.

Ensuring the survival of your business begins during the ‘good times’ with written employment contracts that deal with the possibility of ‘bad times’ in the future. The importance of legally compliant employment contracts during a downsizing cannot be understated, as thefollowing examples demonstrate:

Lay-Offs. In the absence of an employment contract, temporarily laying off an employee can leave your company vulnerable to a constructive dismissal charge. Should the laid off employee not return to their job, even if you want them back, you could be responsible for as much as 18 to 24 months of salary.

Termination. The terms governing termination need to be clearly set out in an employment contract and be legally compliant, should you seek to take advantage of the Ontario Employment Standards Act’s permitted termination on 8 weeks notice (or less) (The statutory notice period may be greater than 8 weeks in certain circumstances, such as large-scale lay-offs of 50 or more employees where the employer’s payroll exceeds $2.5 million). Without an up-to-date employment contract, an employer could be responsible, under the common law, to provide an extended notice period and be responsible for as much as 18 to 24 months of salary.

Demotions. Not all promotions are successful, as previously capable employees can become a serious liability when they cannot cope with new responsibilities and job demands. In the absence of an employment contract that addresses that specific promotion, an employer could be hurt by having the wrong person responsible for such an important position. Only with the appropriate contract in place can an employer take the necessary corrective action.

Best Person for the Job. There is a commonly misplaced belief of entitlement based upon length of service, forcing far too many companies to increase responsibilities and compensation based on one’s length of service. Unfortunately this hinders many companies from getting the best person for the job. By having employment contracts with all employees, an employer can more easily get the best person for the job, while reducing their legal exposure from mediocre employees whom the employer appropriately chose to pass-over.

A well drafted employment contract that establishes the rights and obligations between employer and employee, is a legally binding contract that will govern the employment relationship, including the employer’s ability to demote, hold-back, lay-off and terminate the contracting employee. These are important powers, which can be critical to a company’s survival when faced with economicdifficulties.

Legal Alert: Mandatory Retirement is Prohibited as of December 12, 2006

Imposing mandatory retirement at age sixty-five (65) will not be permitted after December 12, 2006. Any existing contract that requires mandatory retirement after that date is not enforceable. Only in rare circumstances, where the nature of the job requires an earlier retirement (i.e., firefighters), will the new law make an exception to the rule.

It is still permissible to offer voluntary early retirement, by having the individual accept a legally permissible incentive to depart at an earlier age. Employer obligations to provide certain benefits and/or benefits may still be terminated at age 65. As such, specific legal counsel is important to avoid a human rights violation, while securing the appropriate staffing of your company. Not only should employment contracts be reviewed and updated, pension and group insurance plans may require revisions (compliance with ESA 2000 Benefit Regulations is paramount).