The importance of having a well-drafted employment contract cannot be overstated. There is no ‘right’ to employment in British Columbia. However, in many cases employees have a right to “reasonable working notice” or “severance pay” if they are terminated from their employment without cause.
Many employers rely on the Employment Standards Act to determine what amount of severance pay might be appropriate. For example, section 63 of the Act states that after 3 months of employment, the employer has to pay an amount equal to one week’s wages as compensation for the length of service. Many employers believe that if an employee is hired for less than 3 months, they are able to terminate the employee without having to pay any severance, or that the Employment Standards Act determines what severance ought to be provided. That is not the case.
There is both a statutory right to payment for length of service when terminating an employee, as set out in the Employment Standards Act, and a ‘common law’ right to reasonable notice (severance pay) that has been established by the courts.
To illustrate this point, in the case of Hannibal v. Lloyd Hotel Inc., Mr. Hannibal, a hotel manager, was induced to leave his employment with the Ramada Hotel to start working for the Lloyd Hotel. After two weeks of working for the Lloyd Hotel, he was fired. If the Employment Standards Act were to be used to calculate the amount of money Mr. Hannibal might be entitled to, then then Mr. Hannibal would have likely received nothing. In this case, the court awarded Mr. Hannibal six months’ worth of his promised salary as severance, which the Lloyd Hotel had to pay.
If you’re an employer, you are probably asking yourself what you can do to avoid this type of situation. If you think you can contract out of the Employment Standards Act and provide no severance to your employees if you want to terminate their employment, you would be wrong. In the case of Matchinger v HOJ Industries, a car dealership, HOJ Industries, terminated two employees. One employee, Mr. Matchinger, had a contract that allowed for his termination without severance. The other employee had a contract that allowed for his termination on two weeks’ notice. Notwithstanding their employment contracts, HOJ Industries paid severance to both employees equivalent to the minimum amount that they were entitled to under the Employment Standards Act, which worked out to the equivalent of four weeks’ pay, and was much greater than what their contracts provided for. The Court determined that as the terms of the employment contracts dealing with severance were not enforceable (because they attempted to provide payment for less than the statutory minimums), and even though both employees had received the minimum amounts they were entitled to under the Employment Standards Act, those employees were entitled reasonable notice under the common law, which for Mr. Matchinger worked out to the equivalent of seven months’ salary.
In order to limit the amount of notice payable in the event an employee is terminated, some employers include the provision in their contracts that their employees are entitled to the minimum notice as set out under the Employment Standards Act, or other applicable legislation. However, be warned, if you are altering the terms of your current employees’ contracts to accomplish this, if you do not make this change properly, you may be ‘constructively dismissing’ them, making you liable to pay them severance.
If you are drafting an employment contract, it’s well worth your while to retain a lawyer to prepare it, as it can avoid considerable expense down the road if it is not done correctly, both in legal fees and increased severance payments to terminated employees.