Employment contracts in Canada: key clauses, legal risks and best practices

In today's ever-changing workplace, employment contracts play a crucial role in defining the relationship between employers and employees. With employment laws varying across provinces and territories, having clear, well-structured contracts is essential to minimize risk and support consistent onboarding practices.

During a webinar hosted by ADP Legal Counsel Caitlin Hurrren and SpringLaw Labour and Employment Lawyer Lexa Cutler, they shared practical insights on creating enforceable contracts. They explained the difference between offer letters and formal contracts, outlined key clauses to include and offered best practices for effective contract management. 

Why are contracts important?

Well-drafted contracts serve as a safeguard and help foster a transparent, professional relationship between employers and employees. For example, a clearly worded termination clause can help prevent costly common law severance claims if employment is unexpectedly terminated. Employment contracts are essential because they:

1. Clearly define the rights and obligations of both parties
2. Reduce legal ambiguity and reduce the risk of misunderstanding
3. Transform implied terms into clear written provisions
4. Establish the tone and set clear expectations for new hires
5. Safeguard proprietary information and intellectual property

Navigating Canada’s employment standards

Unlike countries that have a unified labour code, Canada operates under provincial and territorial legislation, making it essential for employers to understand their regional obligations. For example, Ontario’s Employment Standards Act (ESA) differs from British Columbia’s ESA in how it handles vacation, leaves and termination.

In addition to statutory law, common law plays a significant role in employment relationships. When a contract is silent on a particular issue, such as notice of termination, common law fills in the gaps, often granting employees greater entitlements based on age, role and length of service. This is why it's crucial to recognize that contracts cannot override statutory rights. A termination clause that offers less than the ESA minimums can be ruled invalid, even if both parties consented to it.

Wrongful dismissal claims often arise from poorly written or outdated contracts. A termination clause that seemed adequate five years ago may no longer withstand scrutiny due to evolving case law. Regularly reviewing and updating your contract templates is not merely a best practice, it is a vital risk mitigation strategy that can help prevent legal complications down the road.

What is the difference between offer letters and employment contracts?

Offer letters provide the basic terms of a job offer, such as position, start date and compensation. They are often used to initiate the hiring process while the full contract is being prepared. Unless explicitly stated otherwise, offer letters are not always legally binding. However, in certain situations where the letter contains detailed terms and the employee relies on them, courts may deem it binding, making it crucial to clarify its purpose.

An employment contract is a legally binding agreement that details the full scope of the employment relationship. It must be signed before employment begins to ensure enforceability, especially regarding clauses related to termination provisions, probation periods or restrictive covenants. It encompasses a wide range of terms, including job responsibilities, compensation structure, bonuses, termination clauses and important provisions related to confidentiality, intellectual property and non-solicitation. Relying solely on an offer letter can introduce legal risks. The employment contract establishes the necessary legal foundation for a successful employment relationship.

Clauses every employment contract should include

An effective contract should include specific, enforceable clauses that address key areas of the employment relationship. The following are six essential components:

1. Termination provisions: Define how and when employment can end, including notice periods and pay in lieu.
2. Job duties and scope: Clearly outline the employee’s responsibilities and reporting structure to set clear expectations and provide a reference for performance issues. Include a clause allowing for reasonable changes to the role as needed.
3. Compensation and benefits: Detail salary, bonus structure, commissions and benefits. Indicate whether bonuses and commissions are discretionary and if they apply during notice periods.
4. Work hours, location and flexibility: Set expectations for working hours, location and flexible work arrangements.
5. Confidentiality and company property: Safeguard the organization’s proprietary information by outlining how it should be handled. Clarify that company property, including data and documents, must be returned upon termination.
6. Restrictive covenants: Non-competition, non-solicitation and non-disparagement provisions protect the employer's business after an employee departs. They must be carefully drafted to ensure enforceability, being reasonable in scope, geography, and duration, and suited to the employee's role. Non-compete provisions prevent employees from working for competitors for a specified time after leaving, while non-solicitation clauses prohibit former employees from poaching clients or colleagues. Non-disparagement clauses prevent negative statements about the former employer. It's important to note that non-compete provisions are rarely enforced in employment law due to their potential to restrict an employee's ability to earn a living, and they are outright banned in some jurisdictions, like Ontario, with limited exceptions. In contrast, reasonable non-solicitation provisions are more likely to be upheld in court.

Common pitfalls and how to avoid them

Navigating the complexities of employment contracts can be challenging for employers, but avoiding common pitfalls can help reduce legal risks and ensure a smoother employer-employee relationship. Watch out for:

• Using outdated or U.S. templates: Relying on templates from online sources or U.S. companies can be risky. U.S. laws differ significantly from Canadian law, and relying on these can invalidate key provisions.
• Failing to update contracts regularly: Employment law is constantly evolving. Review and update contracts regularly to align with current legal standards, as recent court rulings may render previous clauses ineffective.
• Misclassifying employee types: Accurately distinguish between full-time, part-time, fixed-term employees and independent contractors. Misclassifying someone can lead to back pay, vacation claims and wrongful dismissal damages.
• Vague or unclear language: Ambiguous clauses create uncertainty and can lead to litigation. Vague terms like “discretionary bonus” or unclear job duties can result in disputes.
• Inconsistent onboarding practices: Even the best contract won't protect you if it's not properly executed. Contracts should be signed before the employee starts. Otherwise, they may be unenforceable due to lack of consideration. Consistent onboarding is crucial to ensure legal binding and minimize risk.

Best practices for managing employment contracts

To ensure a smooth onboarding process, it’s essential to follow best practices when managing employment contracts:

1. Send contracts atleast 5 business days in advance: Give candidates adequate time to review and ask questions.
2. Never have employees sign on day one: Ensuring contracts are signed prior to the start date solidifies their legal binding nature.
3. Allow time for questions or legal review: Encourage employees to ask questions and, if they prefer, seek independent legal advice regarding the contract. This practice fosters transparency and reinforces that the agreement was reached voluntarily and with a full understanding of its terms.
4. Get a signed copy before work starts: Without this documentation, you risk losing important legal protections and may expose yourself to common law notice obligations if the employment relationship ends.
5. Store copies securely: Digital storage is highly recommended as it facilitates easy retrieval, reduces the chance of loss or damage and ensures consistent documentation across your organization. Access to these contracts should be restricted to only those who need it for their roles.

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This guide is intended to be used as a starting point for questions about employment contracts. It offers practical information concerning the subject matter and is provided with the understanding that ADP does not render legal advice or other professional services.