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If you have employees working in Canada, wrongful dismissal lawsuits likely represent your greatest area of liability exposure in relation to your employees.
Wrongful dismissal claims are among the most common lawsuits brought against employers in Canada. When employees are wrongfully dismissed, employers can be on the hook for damages generally ranging anywhere from 2-to-24 months’ wages (or more in rare circumstances), so the liability risks are substantial. These liability risks do not account for the stress, expenses, and time spent defending against wrongful dismissal claims, which are often fiercely contested and can lead to protracted litigation.
It comes as a surprise to many Canadian employers, then, that wrongful dismissal lawsuits are usually avoidable. In this article, we outline a few simple, but critically important, steps that employers can take to significantly reduce the chances of being sued for wrongful dismissal.
What is “wrongful dismissal”?
A wrongful dismissal occurs when an employee is dismissed without cause and does not receive the amount of notice of dismissal or pay in lieu of notice that the employee is contractually entitled to. In the vast majority of wrongful dismissal cases, the contractual notice entitlement that former employees sue over is “reasonable notice of dismissal” (hereinafter referred to as “reasonable notice”), which all employees are presumed to be contractually entitled to as an implied term of employment pursuant to common law. While there is no precise formula for determining the amount of reasonable notice that any particular employee is entitled to, reasonable notice entitlements can be significant, and it is not uncommon for reasonable notice to be measured in months, and in some cases, years.
Importantly, though, certain contractual terms that are implied at law, like reasonable notice, can be replaced with written contractual terms expressly agreed to between parties. So, while all employees are presumed to be entitled to reasonable notice of dismissal as an implied contractual term, courts will not imply an entitlement to reasonable notice if an employee has a written employment contract that contains a notice of termination clause that expressly provides for some other specific amount of notice of dismissal (hereinafter referred to as a “termination clause”).
Termination clauses vary, but they can – and usually do – provide for substantially less notice than the amount of reasonable notice that courts would otherwise imply. As such, when written employment contracts contain an enforceable termination clause that removes any implied entitlement to reasonable notice, the risk of an employee bringing a wrongful dismissal claim, and an employer’s potential liability exposure where a wrongful dismissal claim is commenced, can be significantly reduced, if not eliminated entirely.
Step 1 – Adopt written employment contracts with enforceable termination clauses
The process of using a termination clause in an employment contract to prevent a court from implying an entitlement to reasonable notice might sound simple, but courts have established very strict and onerous requirements for termination clauses to be enforceable.
For one, a termination clause will be unenforceable if it does not “clearly and unambiguously” stipulate the precise amount of notice of dismissal to which an employee is entitled. The standard of clarity that courts require in this regard is very high. For example, in Dodich v. Leisure Care Canada, the termination clause at issue was held to be unenforceable because it permitted the employer to terminate employment by providing “no less than two weeks per year of service,” and thereby failed to provide for a “maximum or upper limit” of notice to which the employee was entitled.
Termination clauses will also be unenforceable if they attempt to allow employers to terminate employment with less than the minimum amount of statutory notice of dismissal or pay in lieu of notice that employees are entitled to pursuant to applicable employment standards legislation. In B.C., for example, a termination clause that entitles an employee to two months’ notice per year of service will likely be unenforceable, notwithstanding that the notice entitlements under such a clause would far exceed statutory notice entitlements after one year, because, pursuant to the B.C. Employment Standards Act, employees are entitled to one week of notice after just three months of employment.
Other clauses in employment contracts can also render termination clauses unenforceable that would otherwise be enforceable. In Waksdale v. Swegon North America Inc., for example, the employer argued that the “without cause” termination clause in the employee’s contract eliminated any implied entitlement to reasonable notice. While the Court agreed that the “without cause” termination clause was properly drafted, it found that the “with cause” termination clause in the employee’s contract was unlawful, and on that basis, held that the “without cause” termination clause was also unenforceable.
To ensure that employment contracts, including termination clauses, are drafted in enforceable language, it is best practice to have them prepared or reviewed by legal counsel.
Step 2 – Correctly implement written employment contracts
How an employment contract is implemented is equally important as how it is drafted, because even if an employment contract is drafted properly, it may be unenforceable at law if it is not implemented correctly.
When dealing with job candidates, it is critical for employers to ensure that written employment contracts are not entered into after an implied employment contract has already been formed at law, in which case the written employment contract, even if accepted by the employee, may not be enforceable. An implied employment contract can be formed simply by a candidate agreeing, even verbally, to work for an employer in a certain position for a certain amount of compensation, and many implied contracts are formed inadvertently. To avoid this outcome, written employment contracts should be sent to candidates when the first offer of employment is made and whenever an updated offer is made with a material change of terms. Employments agreements should also be signed and returned before employees commence employment.
For existing employees, the process must be handled more delicately. Written employment contracts will only be enforceable if existing employees receive something of value (that they are not already entitled to) in exchange for signing the contract. This consideration often comes in the form of a signing bonus, pay raise, or increased benefits. More importantly, if a written employment contract is imposed on, rather than offered to, an existing employee, the employer may be deemed to be “constructively dismissing” the employee, in which case the employer may be liable for wrongful dismissal. As such, employers should only consider imposing written employment contracts on existing employees as a last resort and always with the guidance of legal counsel.
Step 3 – Properly terminate employment
Even if a written employment contract is drafted and implemented correctly, it may nonetheless be unenforceable if an employer egregiously repudiates the contract through the manner in which it dismisses the employee. This occurs most commonly when an employer either constructively dismisses an employee or frivolously dismisses an employee for cause.
To reduce the risk of constructive dismissal claims, make sure that key terms of employment are not changed without mutual agreement or proper notice, and that workplaces are healthy and non-toxic. Not only will this lead to a happier workforce, but it will also support the enforceability of your employment contracts.
Before an employer dismisses an employee for cause, it is best practice to obtain legal guidance to ensure that it is done in good faith, supported by facts and evidence, and defensible at law. Fortunately, if written employment contracts are in place that oust common law notice entitlements, employers can often dismiss employees without cause by providing only a few weeks’ notice, largely dispensing with the need to terminate employees for cause.
While the above steps cannot prevent an employer from being sued for wrongful dismissal, they can drastically reduce the likelihood of that happening and reduce or potentially eliminate an employer’s liability exposure. If you would like to implement written employment contracts at your workplace, the Labour and Employment Group at Miller Thomson LLP is happy to help.
