Managing Business Risk: Use Employment Agreements


Written by Andrew Powell, Partner

From an employer’s perspective, employees are a necessary evil.  A growing business cannot exist without employees, but it is vital for any business owner to remember that employees are not invested in the business that employs them.  Employees are not owners.  The relationship of employers to employees is very much a contractual one.  Employees provide a service in exchange for money, so in a very real sense, the business is the customer of the employee.
The employment relationship constitutes a very special type of contract.  Although for many purposes at law employees are differentiated from independent contractors, they are in fact in a contract with their employer.  What makes the employment contract a little unique is that many of its terms are imposed by law – either under legislation such as the Employment Standards Act (for non-union workers) and the Workers Compensation Act, or because of common law principles that affect the employer-employee relationship.  In either case, many of these terms of an employment arrangement may not be understood or even be known by either party. For this reason, when an employment relationship breaks down, there may be liabilities faced by employers that were unexpected and for which the employer may well be completely unprepared. 
A typical example, frequently litigated, is the calculation of severance pay.  Severance pay is an amount of money paid to a worker who has been dismissed without cause, and it is intended to cover that employee’s lost wages for enough time for that employee to reasonably be able to find similar employment.  Generally, it is assumed that an employee will become more secure, more specialized, and more highly-compensated the longer that he or she occupies a position, so they will require more time to find equivalent positions if they are let go.  Longer-term employees require longer notice periods, and consequently higher severance payments in lieu of that notice period.
Under s.63 of the Employment Standards Act, the employer’s liability for severance is one week’s wages after three months of employment, two week’s wages after twelve months of employment, and an additional one week’s wages per year of employment up to a maximum of 8 week’s wages.
Case law in British Columbia, however, has put quite a different light on the amount of appropriate severance pay.  Although each case is determined individually, it would be more accurate to say that an employer’s real liability is closer to one month’s wages per year of service, to a maximum of about 24 months.  This is a significantly greater liability than the one offered by the Employment Standards Act, and in the absence of a written employment contract, it is likely the one that will govern.  A very important way to limit liability for severance pay, then, is to have a written employment agreement in place that confines severance pay to the amount set out in the Employment Standards Act. 
Employment agreements can do much to help provide certainty and security in a number of ways, and can help cover exposure in areas that employers never anticipate being contentious until after the employment relationship breaks down and a dismissal becomes necessary for the business.  Employment agreements can not only limit severance pay, they can define workplace responsibilities, determine compensation, and can even set out circumstances where employees can be dismissed without notice or severance pay.  They can be tailored to any business or individual circumstance, and can be a very significant legal tool that a company can use to manage the consequences of its business decisions and take control of its own risk.