Value of Employment Contracts for Solo and Small Firm Lawyers

  • January 22, 2021
  • Stuart Rudner, principal lawyer

Imagine this scenario:

There is a worldwide pandemic, the global economy is devastated, and all non-essential businesses are ordered to shut down. You are able to continue a small portion of your practice, but revenues drop by 75% and you can’t afford your clerk and junior. You consult the employment standards legislation, confirm the rules regarding how layoffs are to be implemented, and then let them know that you have to lay them off temporarily until things pick up.

The next thing that happens is that you receive an aggressive letter from an employment lawyer threatening to bring a claim for constructive dismissal on their behalf because you did not have the right to impose temporary layoffs. They will be seeking damages for wrongful dismissal, as well as punitive damages.

Are they right?

If you are like most employers, they probably are. Most employers do not use employment contracts strategically. Many of their employees don’t have contracts at all, or if they do, they are signed after the employee was already hired (rendering the contract unenforceable in most cases). Very few contracts include temporary layoff clauses, and most do not have enforceable termination clauses (it’s very easy to draft a termination clause, but much more difficult to prepare one that will give you the protection you desire).

As a result, you may well be on the hook for substantial damages, since a constructive dismissal triggers the same severance obligations as a “regular” dismissal. The savings you achieved through the layoffs may be much less than the costs you incur as a result, especially when you add in your legal costs.

Contrast that scenario with what many of our clients experienced:

There was a worldwide pandemic, the global economy was devastated, and all non-essential businesses were ordered to shut down. They had to lay some or all of their workforce off temporarily. They contacted us, and we confirmed that the contracts we helped them implement give them the right to do so. As a result, they laid off employees without fear of liability for constructive dismissal.

It is particularly rewarding to hear our clients talk about how working with us to take a strategic approach to HR has paid off. As one of our clients recently said:

I have known Stuart for many years and when it came time to redo our employment agreement he was my only call.  He changed our simple 2 page agreement to a detailed 14 page agreement that protects us and removed any doubt about our responsibilities under the current laws, every year we update the agreement to make sure it meets the current legislation and best practices.  From Day 1 we had a clause to allow temporary layoffs with not paying severance, I had no clue at the time why Stuart included it in the agreement, but based on the current COVID-19 crisis he proactivity protected by thinking ahead.

That was the case for many of our clients.

Others came to us because they had to lay employees off but did not have a temporary layoff clause. We worked with them to implement layoffs with the agreement of the employees, which is the second-best way to implement a layoff without risk of a constructive dismissal claim.

Employment contracts give you flexibility and reduce labour costs

For most of my career, I have been encouraging employers to use employment contracts strategically. I often say that it will help you to reduce labour costs, minimize risk/liability, and maximize your rights/flexibility. That is no less true today than it was in the past.

First, as discussed above, a contract with a temporary layoff clause gives an employer the flexibility to lay people off temporarily. Otherwise, the law has always been clear: employers do not have the right to impose temporary layoffs[1]. Employment standards legislation establishes how temporary layoffs are to be implemented, but it does not give employers the right to do so. That right must be founded in contract. A simple clause can achieve this goal, but it must be properly implemented.

Second, a termination clause can be used to limit severance costs and to avoid the uncertainty of “reasonable notice”. In the current circumstances, that could mean tremendous savings for businesses that decide to permanently reduce their workforce (or shut down completely), as well as businesses that impose layoffs and find themselves facing a constructive dismissal claim. In either case, the termination costs will be reduced.

Contrary to popular belief, every employee in Canada has a contract of employment. If there isn’t one in writing, then the contract is comprised of the terms agreed upon verbally (typically position, salary and other basic items), those established by past practice, and a host of terms implied by law, which are generally not to the benefit of the employer. Even if there is a basic “offer letter”, the law will impose other terms unless they are explicitly addressed.

Unfortunately, the law regarding the enforceability of employment contracts and termination clauses continues to evolve, creating unnecessary uncertainty. Even during the pandemic, we have seen several significant court decisions which impact termination rights and post-termination obligations. The reality is that the majority of termination clauses do not achieve the result that is intended. If you are not an employment lawyer, trying to do it yourself is a mistake.

Lawyers need Advice Too

The old adage is that “the shoemaker's son always goes barefoot". Lawyers are sometimes similar: we tell everyone to get proper legal advice, but then we ignore that and think we can do everything ourselves. In many cases, that includes drafting our own employment contracts.

If you are a solo looking to add associates or staff, or you already have a team but never got proper employment law advice, now is the time.

I am an employment lawyer as we all as an employer. I understand the practicalities of running a law firm, which is why I can help colleagues to run theirs more effectively. Our firm advises many law firms, and the first step is almost always to put strong employment contracts in place.

Contracts and policies are your best opportunity to improve your legal position; don’t overlook it.

About the Author

Stuart Rudner is a senior employment lawyer and mediator. Rudner Law works with employees and employers, including many law firms, to help them understand their workplace rights and obligations and adapt a strategic approach to HR. You can reach Stuart at stuart@rudnerlaw.ca and follow him @RudnerLaw

 

[1] There is a compelling argument that our courts will treat temporary layoffs differently in the context of these unprecedented circumstances and acknowledge the impossible position many employers have been put in. That may be true, but it has not happened yet, and I submit that it is better to know that you have the right to lay someone off rather than lay them off now and take your chances.

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