Apr 4, 2019
Emerging and high growth companies in Canada will be confronted with a number of employment-related risks and issues at every stage of their business. Given that employment law and employment standards in Canada vary from province to province, your business should be cognizant of the appropriate regulatory framework that would apply.
Whether determining when to engage someone as an independent contractor or as an employee, or drafting an employment agreement, your business must understand the associated liabilities and potential risks. This presentation by Allison Di Cesare and Summer Danakas, associates in Osler’s Employment & Labour Group, examines key employment-related issues and describes best tips and practices to guard against regulatory scrutiny, protect your business and comply with employment standards legislation, from hiring to termination. Available in both webinar and PowerPoint format, the goal of this presentation is to help you navigate the following issues:
- Key differences between employees and independent contractors
- How “interns” are not a recognized class of worker
- Why employment agreements are a critical part of risk management when it comes to your employees and why it’s important to sign the document before the individual starts employment
- Key employment compliance issues including employment standards, human rights, and occupational health and safety
- Important considerations when terminating employment
Slides: Employment law 101 for start-ups
For more information, please contact Allison Di Cesare or Summer Danakas.
This presentation is part of Osler’s Emerging and High Growth Companies 101 series, designed to help emerging ventures navigate through the various issues and legal requirements they will encounter throughout their growth cycle.
ALLISON DI CESARE: Thanks, Simon. So one thing that I wanted to just make sure was said before we get started is Summer and I are both lawyers. We're both litigators. We could talk for the next three hours, and no one's going to enjoy that. So we'll save some time for questions at the end, but if you do have any burning questions while we're on a particular topic, put your hand up. We can address them as they come along. Although we do have a lot to cover in 45 minutes.
So these are sort of the-- we've put them in the buckets of things that we deal with every single day with clients of all shapes and sizes, but especially with startup clients, especially with earlier stage startup clients, and where we often get a lot of tone of surprise when we give the explanations that we give. So we want to make sure that you guys have a general understanding of the independent contractor issues, there's no such thing as an intern, how to properly handle employment agreements, some other key employment standards issues, and then how to properly execute a termination. Because lately in particular, we've been seeing a lot of those become very bumpy. And they can become a nightmare, a headache, and also a real financial liability. So let's start with contractors. I'll let Summer jump in.
SUMMER DANAKAS: OK. So common thing that comes off is sort of when to engage someone as an independent contractor versus an employee. And in certain cases, it may be helpful to do that, and you may prefer to retain someone as an independent contractor versus an employee. It's important to note there are some sort of key distinctions and differences between the two relationships. And so on this slide is sort of just a high level overview of some of those key differences.
Generally from the company's perspective, independent contractor relationships can be advantageous in certain ways. So for example, there's often fewer administrative obligations. I.e. you don't have to deduct and remit payroll taxes. Generally it can be less costly when it comes to terminating the relationship in independent contractor relationship versus employee, though a lot of that will come down to the specifics of the employment or independent contractor agreement and the termination provisions set out there, which we'll get you a bit later.
From the individual's perspective, often they may prefer to be retained as an independent contractor because there are some inherent benefits to them as well, i.e. tax benefits. So the ability to claim business expenses in order to reduce taxable income. But regardless of sort of those potential benefits to either side, it's important to know that you can only enter into an independent contractor agreement if when you look at the relationship as a whole in its totality, it supports the designation of independent contractor.
So saying that an agreement that this person is an independent contractor alone is not determinative. The factors and the facts sort of in the context of the relationship need to support that this individual actually is truly an independent contractor and not an employee, particularly because misclassifying someone as an independent contractor who, in fact, is an employee can carry some significant liability for the company, which Allison will speak to in a minute.
In terms of how to know whether someone truly is an employee versus independent contractor, unfortunately there's not sort of any true bright line clear test. But there are some general factors, which is what's laid out on this slide for you, that the courts have looked to to sort of help determine whether or not someone is an employee versus independent contractor. And so you'll see a lot of them sort of revolve around what seems obvious, which is sort of independence. So how truly independent is the person?
Their exclusivity of services. Are they exclusively providing their services to the company? So an employee will be exclusively, unless they're a part time employee, providing full time work for the company. An independent contractor may be providing consulting services, for example, to the company. But that's part of a larger consulting practice they have. And so they're not exclusively providing those services only to the company on a full time regular basis.
Who has control over how and when and where those services are provided? The more control being exerted by the company, the more likely it is that the person is an employee. Same with something like the tools being provided. Who's providing the tools more often? If the company is giving the individual an office and a computer and systems and a phone and all of the things that they would need to do their job, again, more likely that's going to weigh in favor of them being an employee versus someone who's in business for themselves just being engaged to provide services to the company. So these are sort of the considerations, the factors that you would look to to consider truly how independent is this individual and is it more likely or not that they are an employee versus independent contractor.
ALLISON DI CESARE: Yeah. And I think the last point is another one to mention, and this has come up with Uber and with a few other companies. Integration into your organization. If this person or this category of people is absolutely integral to the business operating, that's a factor that will weigh very heavily on the employment versus contractor side of things.
So I kind of like to use a smell test. If it walks like a duck, swims like a duck, quacks like a duck, it's a duck. You can look at legal tests all you want, and Summer went over one. The CRA uses a kind of similar test. It really depends on who's looking at this. But ultimately, it's a bit of a smell test. If they look kind of like all of your other employees, they're still coming and going in the same way, they're both salespeople, for example, and you can easily compare they're both coming to company events, you'll kind of have a gut feeling that should at least lead you to call the lawyers and say, hey, do we have an issue here? Because you can clean it up. But what ultimately happens and what we often hear from clients is they wanted this.
But the unfortunate part, and Summer mentioned that, sometimes contractors want to be contractors. But the unfortunate thing here is they can have their cake and eat it too. So someone can say, I want to be engaged as a contractor. I think it's great for taxes. It'll be easier. We don't have to worry about CCP and EI, yada, yada, yada. And then if things go sour and you terminate the contractor arrangement, maybe your contractor agreement said 30 days notice. Maybe it's a two weeks notice and you abide by the contract.
They can then stick up their hand and say, no, no, no, I was an employee. Doesn't matter what it says on this piece of paper. It doesn't matter what we agreed. So you are now liable for common law severance entitlements, which we'll talk about in a minute, but much more expensive than what you could have got if they were on an employment agreement with an enforceable termination clause. You can be liable for the failure to have deducted and remitted the CCP and EI. You can have taxation issues with the lack of income tax. You can have ESA liability because you haven't been, for example, paying them overtime if they would have been entitled to it as an employee or vacation pay, that kind of thing.
So it can become a bit of a mess. And all that to say, and this issue comes up a lot, you'll have to, like anything else, make an assessment of legal risk tolerance versus business needs. Sometimes you just need to bring someone on. You need to bring them on as a contractor and you might be willing to take the risks. You might have a great relationship with them. But these things do go south. We see it happen all the time. And they can be material liabilities.
And one final point I want to mention on this, because we do see this happen a lot. You should not be bringing people in as contractors as a replacement for a probationary period that you could have available to you under an employment arrangement. That's not the proper use for a contractor, and you're setting yourself up for failure because if you bring them on as an independent contractor for a probationary period, then you bring them on as an employee. You've lost any argument that they were a true contractor in the beginning assuming they're doing the same thing when you formally put them on that employment agreement.
So then you have that risk exposure for that three month period plus arguably, depending on how you executed it, the employment agreement is not enforceable because they were working for you three months before as an employee. So you set yourself up for an even bigger problem. So if that's the reason why you want to do it, it's a test, you can consider a probationary period under a standard indefinite term employment agreement. Or alternatively, less ideally, a fixed term employment agreement. OK, before I move on to interns, any burning questions about contractors? Yes?
ALLISON DI CESARE: They can present some administrative challenges. They have to be very carefully entered into. If you're going to do a fixed term employment agreement, you should be reaching out for a specific fixed term template, not just making tweaks to an indefinite one that you have. One super important point that we see gets screwed up just by inadvertence all the time is if you have someone on a fixed term agreement and they work for even one day past that end date, they now have no binding employment agreement. You've got a common law severance problem. Not to mention the fact that if someone is on a very long fixed term agreement or a series of fixed term agreements, courts don't like that because they see it as an attempt to try and get out of termination entitlements. So you can end up having a bigger problem from that standpoint.
And then a final point is if it's not properly drafted so that you make it very, very clear that you have an early exit and a really tight termination clause, if you try to terminate early, they would be entitled to pay out for the rest of the term had they continued to be employed for that fixed term you put in the agreement. So it's just that there are additional considerations with fixed term agreements. OK. Yes?
AUDIENCE: For the probationary period on a normal employment, are there restrictions? [INAUDIBLE]
ALLISON DI CESARE: So kind of. It has to be done carefully, again, like everything I'm saying. Because the reason why probationary periods are typically three months, or in some provinces 90 days, is because that's the period under the statute where you don't have to provide notice or pay in lieu of notice if you terminate someone. And that's typically what the probationary period is designed to reflect.
So that's why it's usually three months. We always recommend three months. If you want to go longer, you can, but you need to do it carefully to make sure this is for the purposes of assessing your performance. But if you're terminated in month five, we will still comply with all obligations under the ESA. You can't extend that period for the purposes of termination entitlements.
OK. So let's move on to interns. Like I kind of said at the beginning of the presentation, there's basically no such thing as an intern as a legal concept. You can call someone an intern, but that's not a term of art at law. There's nowhere in the ESA that says, here's what an intern is. And actually on that before I go on, I want to make sure everyone in this room understands that employment law in Canada and employment standards in particular varies from province to province. Every province has its own employment standards legislation, its own labor legislation, human rights legislation, et cetera.
So if you start engaging employees in other provinces, different considerations might apply. And that's something that you should always be bearing in mind. Something that I always tell clients is that every province, particularly the big four, have very useful resources on the applicable Ministry of Labor websites that have one page explainers on overtime, vacation, whatever that are designed to be read by employees. They're drafted in a very simple, non-legalese way. So if you're entering into a new jurisdiction, you want to understand employment standards, that's something that I suggest you take a look at.
But anyway, so interns. You can certainly call someone an intern. Lots of our clients do. But the key is what are that law? Realistically, you either have someone who is subject to employment standards legislation or someone who is not. So the first bucket of people is employees. The second bucket of people who are not subject to employment standards legislation are independent contractors, like we talked about. Bona fide, true independent contractors. Or a very small group that is also exempted that I'll talk about in a second.
Well, OK. So the small group, it's co-op students. But co-op students defined, again, narrowly. Because something you need to keep in mind is in Ontario and in every other province, employment standards legislation is remedial legislation. It's designed to benefit employees. When there is ever a doubt as to how something is interpreted or who falls under it or not, it's going to go in favor of the employee because it's designed to protect them. So if you ever have a question about whether someone is a co-op student or not within the meaning of the legislation, they're probably not.
The legislation basically has a very narrow carve out, and this is Ontario, that says if you are a student in a college or university program and you are doing work for the company and that specific work for that specific company has been approved as part of your educational program, you are exempt from the ESA. You're not entitled to minimum wage, vacation, overtime, none of it. But that's the limited carve out. So someone who just says this is my field of study, I think it would be very helpful if I took on a co-op term, but it's really a semester off or it's their summer, they're not going to fall under that bucket. It's this very narrow group of people.
And that's why we say in practice, if you're going to bring on a co-op student and you're not going to pay them, which we'll talk about in a second, but if you're going to bring on a co-op, calling them a co-op, calling them an intern, and you're not planning on paying them, you should get a letter from the university that says we have approved them working for ABC Co. Because then you're just sure. This falls under the academic program. If the Ministry of Labor comes knocking, I will show them this piece of paper and we should be good to go.
One thing that I will say, though, is in practice, even with startup clients, most co-op students are getting paid minimum wage. We don't see unpaid arrangements all that often. Not to say they're not happening. They just might not be coming across our desk because people might not want to know what we have to say about it. Because another point that I will make, and this kind of goes back to the ESA being remedial legislation, is that the Ministry of Labor for years and years, and maybe we can say this is less the case with the current government, but they have had a focus on what they consider precarious employees in vulnerable sectors. And they do random blitzes.
So while compliance with employment standards legislation is largely complaints based, someone can call the Ministry of Labor right now very easily and make a complaint against your company, they also do have the power, and they do, do random inspections. And sometimes those inspections are focused on a particular business and sometimes they're like, we're going to look at the magazine industry. That's one that they've done, because there's a lot of unpaid interns in those businesses. So they can do a blitz of a specific category of employers.
Sometimes they give warning, but it's just on their website and you guys probably aren't checking the Ministry of Labor website every day, because even I'm not. But there is the potential that startups could potentially be subject to one of those blitzes. The tech industry in Toronto is booming. Some companies are your Wealthsimples and they're big and sophisticated, and some of them are two guys in their basement who then bring on an employee. And ultimately, those two are not being treated any differently by the Ministry of Labor. You're not getting any credit for how little money you have or how unsophisticated you are. They will treat you the exact same as they will treat Microsoft. So that's something that you should keep in mind.
So all that to be said, the key takeaway is there's really no such thing as an intern. If you want to bring someone as an intern, you can. You should generally be paying them unless they fall under that narrow co-op student exemption or they are really an independent contractor. Although I will say going back to those factors we were talking about, if someone's an intern, they're probably not a contractor, because you're probably telling them what to do. Someone who's categorized as an intern is not going to have a whole lot of control about what they're doing. So generally they should be paid. Any questions on that one? Yes?
ALLISON DI CESARE: If they are an employee, yes. Yeah. One other thing that I was going to mention is there's also no such thing as volunteering for a for profit enterprise. I've seen this one come up before where people say, so-and-so is really excited about the business. And that might very well be true. They might be your friend. They might be super interested in what you're doing and they want to get involved and help out maybe in the hopes that someday they become an official employee.
Again, you can't contract out of the ESA, verbally or otherwise. That kind of arrangement still carries risk. Maybe not practically if you still have a great relationship and they're still your best friend. But again, like the contractors, these relationships can go sour, and that's potential liability for the company. So with that, I'll turn to Summer to talk about employment agreements.
SUMMER DANAKAS: So employment agreements. Very easy to sort of just see these as paperwork that you just have to do and get done and it's sort of this just administrative task and just a step in hiring an employee. But the fact is that your employment agreements are an absolutely critical part of risk management when it comes to your employees. The reason being that the employment agreement is really the foundational document that sets out all of the expectations between the parties, the company, and the employee. And it's going to be those terms and those entitlements that govern not only the rest of the employment relationship but also what happens when that employment relationship comes to an end.
And so any time that we get a call from a client and something has gone wrong, they're having an issue with an employee, they're considering terminating an employee, the very first thing that we will ask you for is a signed copy of their employment agreement. And that's because any of the advice that we give, any of the decisions that are made are going to be based on what the terms and entitlements are as set out in that employment agreement.
So if an employment agreement is not properly drafted or properly executed, the employment relationship becomes governed by common law and statute. The Employment Standards Act, as Allison's mentioned. Common law is what we sort of called judge made law. So it's the law that's made by the courts. And it is that law that will be and the terms of common law that will be implied if there's no contract or employment agreement to override that. And the thing to know with common law, which Allison's already touched on, is that it's incredibly employee friendly and incredibly generous in terms of their entitlements.
So for example, one of the sort of biggest issues and things that's most important about a properly drafted employment agreement is the termination clause. For us, they're sort of the very first thing that we turn to when we're asked to help advise on a termination. Because most often the disputes that we see with our clients are going to revolve around what exactly are the employee's entitlements upon a termination? If there's no termination clause in your employment agreement or it's just not properly drafted, the defaults on termination is going to be common-law entitlements and what's called in common law reasonable notice or pay in lieu of notice.
And it's that common law reasonable notice that you're trying to get out of in having a properly drafted employment agreement with a termination clause that's completely clear on what the individual's entitlements will be upon termination. Because if you have that contractual language, then that is what allows you to, in a sense, override this concept of common law reasonable notice, which is incredibly generous to employees.
For example, there could be situations where under common law reasonable notice, an employee could be entitled to up to 24 months.
ALLISON DI CESARE: And more. [INAUDIBLE] are eroding that cap.
SUMMER DANAKAS: Yeah, 30, 36 of full compensation. Full compensation meaning salary, benefits, bonus, commission. Also they're sort of generally this floor of three months. So there can also sort of be this huge imbalance if you're terminating someone early in their employment, for example.
So needless to say, avoiding this concept of the common law and common law reasonable notice is absolutely critical. From a risk mitigation standpoint, it's going to save you a lot of time and a lot of money. And that all comes back to having a properly drafted and sound employment agreement with a binding and enforceable termination provision.
ALLISON DI CESARE: Yeah. And it really can't be emphasized enough that it's not a matter of just saying you will be entitled to only the ESA and we are contracting out of the common law. These clauses are picked apart by the courts. There's a new decision almost weekly it seems that completely contradicts the one we saw the week before, which is why we may be driving some of you guys crazy by setting new templates multiple times a year.
But the reason that we're doing that is because we're keeping an eye on the case law and we're updating everything in the agreement but particularly the termination clause based on specific guidance from the courts, because they will do everything in their power, since the common law is so generous, to get that for the employees. And they interpret these clauses, they scrutinize them.
And really if they read a clause and there's any theoretical way, shape, or form under any circumstances, not necessarily circumstances applicable to that employee, but under any potential circumstances where this would be contracting out of the ESA, 100% void the entire clause. If it doesn't very clearly contract out of common law and wrongful dismissal damages, void. And I'm going a bit into the weeds here, but there's a difference between cause and common law and the willful misconduct standard under the legislation. If it conflates the two, void.
And again, so we draft these. They end up being like half a page long, and that's unfortunate, but they kind of have to be. You shouldn't be looking at the termination clause on Google. It's not going to be good enough. Oftentimes a lot of off the shelf ones people get from websites are very, very old. Again, we sweat over these. We update them constantly. And so that's one of the very, very, very important issues that we see with employment agreements when they're problematic. We see it in diligence.
We see it when we're terminating people and we look at their agreement and we're like, guys, this clause is worthless or it's very high risk and you're going to get a demand letter and we're going to be on the hook for months and months of severance, whereas with a properly drafted agreement, it would have been a couple of weeks, maybe. So it really can be material. So I wanted to also talk about a few other-- oh, sorry, jump in.
ALLISON DI CESARE: Sometimes we have to. It depends. A clause that was drafted on an Osler form a year ago, we don't think you need to go back to your entire employee population and say, hey, you need to resign now, because it's still pretty good. It's not necessarily 100% of the way there. But realistically, there's no clause because the courts do crazy things all the time. We can never give you a clause where we 100% can guarantee it's ironclad. We can guarantee it's ironclad based on the case law up to today. But we don't know what a judge is going to say tomorrow. I can pull up three decisions and show you how the Ontario Court of Appeal has completely contradicted itself three times in the last four months.
But yes, there are sometimes scenarios where we do advise clients, and this happens a lot in the context of financings, for example, because sometimes investors will want you to do it, where we do have to go back and get the existing employee population to sign a new employment agreement. And when you do that, you've got to be careful about how it's handled from an employer. You don't want an attempt to mitigate legal risk to turn into an employment relations nightmare. So you've got to be careful about the messaging.
You also have to give them something. You can't just hand someone a piece of paper when they're already employed and say, sign this and have it be enforceable. They need a signing bonus or they need a raise that wasn't already promised, maybe an option grant, which is sometimes why these things can come in financings if you're planning on doing an additional option grant anyway. But yes, sometimes we do recommend it.
Sometimes we say, hey, we're flagging that there's a risk with this clause. It's not a guarantee it's unenforceable, but there's risk. And then what we tell clients is, you should be keeping an eye on this so that when organic opportunities come up for that particular employee, like you decide to give that employee a promotion or a raise, you do that and put them on a new agreement at the same time.
ALLISON DI CESARE: Well, you've got to be careful with annual salary [INAUDIBLE]. Yes, you can. But if it's like, for example, we have some clients that do an annual inflationary increase. If it's just a run of the mill you were going to get this anyway, it's not going to be enough. But if you've decided to give them a gratuitous salary increase, yes. And that would be a great time to do it.
And that's actually-- so the issue that I just talked about with consideration, it's kind of connected to this. So in order for any contract to be binding and enforceable, there needs to be consideration. You need to have a give and take. They need to be getting something for signing it. And that's why something that I end up telling clients every single day is you need to make sure that employees are signing employment agreements before they start work. They're not coming into the office on day one and signing it.
They need to sign that piece of paper before they start work. If they sign it even a minute after they've started working for the company, that agreement is likely not enforceable. And that includes your termination clause. That includes your IP protections. We've seen this for developers where I'm looking at it and I'm like, this was signed a week after they started work. This [INAUDIBLE] nothing. We need to get them on something better.
And it can be fixed. Sometimes particularly with big gets who need to give their employer notice and who are keen to get an offer letter right away and want to jump right in, sometimes this just gets missed. And they start working and you haven't got them on an agreement yet. It's not ideal, but it can be fixed. And that's why if any of you have gotten our templates in the past, we send you a pre-hire form and a post hire form. And the post hire form needs to be used in this scenario, because it builds in a signing bonus. And that's the extra thing that they are getting to make the agreement enforceable.
Typically, we just say give them $100. The case law is unfortunately archaic on this. We're looking at British cases from when Canada was still very much Britain where they say a peppercorn is enough. But we've also seen cases where particularly for things like restrictive covenants, a court will say, you know what, $10 was really not enough to bind them to all of this stuff. So from our perspective, $100 should be enough. Theoretically, the more the better, but market is give them $100, have them sign that agreement. A related point. Oh, sorry.
ALLISON DI CESARE: Yes. Go after them? Terminate them?
ALLISON DI CESARE: They just never came. Yeah, I mean, so it would completely depend. Typically you would need to handle that scenario by reaching out to them. You don't want a scenario where they didn't show up because they're in the hospital and then you turned around and terminated them because now you have a potential human rights issue. You should be trying to reach out to find out why they're AWOL. If they're just AWOL and they're completely not responding to you, you terminate the agreement. You don't owe them anything.
ALLISON DI CESARE: So technically they're still your employee. And so if they've signed a contract and then they've gone and worked for a competitor, I mean, we're kind of opening a can of worms here with potential issues. You could have non-compete issues. You could have breach of confidentiality clause issues. So that's a bit more complicated than the scope of this conversation. But the main point is if they've signed an agreement even if they didn't show up on day one and said their start date is that day, they're your employee. You can't just let it hang. It needs to be addressed.
AUDIENCE: What's the view on internal movement? So if someone is on board with us for a year or so, and then they're moving laterally, their manager has changed, their job has changed dramatically, would you still be concerned about them signing prior to the start date of that role?
ALLISON DI CESARE: So there's a couple of issues with that. If their employment is changing dramatically for the worse, you have a separate issue, which is called constructive dismissal, which is basically you have effectively terminated them if you do that without their agreement. And that's a whole other hour long presentation, but that's something you should be bearing in mind. If you start making unilateral fundamental changes to someone's employment, you're running the risk that you have effectively terminated them by doing so.
AUDIENCE: Different departments.
ALLISON DI CESARE: Yeah, I mean it depends on what you're going to do. If you are just sending them a simple letter that says, hey, all of the terms and conditions are remaining the same, but you are now in this department and you're reporting to so-and-so, I'm not so worried about that, because the employment agreement that you signed at the beginning before the start date, that's what's got the key stuff. But if that agreement was problematic and you're using this as your opportunity to get them on a better one, then yes, before they move to the new position. Yeah.
OK, so a related issue to the signing before the start date, and it kind of goes to that same concept of consideration, is you should be avoiding communication that could be viewed as an employment agreement in principle. There's no rule everywhere. This isn't buying a house. There's no rule that an employment agreement has to be in writing. So you could theoretically come to a verbal agreement. And you've already agreed on salary and title and start date.
And if you've done that and you haven't made it crystal clear that it's subject to them signing a more fulsome employment agreement, again, that more fulsome employment agreement may not be enforceable because you already have a valid contract that covers terms that don't include an IP agreement and termination clause, restrictive covenants, that kind of thing. So we always recommend. Make sure we know sometimes you're giving these verbal assurances, but make sure it's clear at all times they have to sign an employment agreement. It will have more detailed legalese.
Try to avoid letters of intent or offer letters that come before the employment agreement. The way that we draft these is that the agreement, like the Osler template, that's the offer. It's the offer. It's the employment agreement. It's all of it in one document. And the same can be said for email communication. Again, you can say, hey, we're thinking x amount. The full terms and conditions will be set at an employment agreement. That kind of thing. You can talk about those issues before they sign. You just have to be careful about inadvertently coming to a contract before they've actually signed that piece of paper.
I think those were pretty much-- oh, the one other issue I wanted to raise. We often see-- well, we get questions a lot with clients of all kinds. But they basically, they send me an email and they go through the contract and they say, we've got this new hire coming in. They're a developer. Here are there problems with sections 1 to 12 of the employment agreement. And then they go through, section one, they don't like this. Section two, they want this taken out. Section three, they want this taken out. Section four, they want to add this.
Unless you're bringing in like a VP, a C-suite, a key person, don't move off the templates. It's going to complicate your life. Everything is in there for a reason. It's going to complicate things from a diligence standpoint. And certainly never change the [INAUDIBLE]. The confidentiality and IP agreement. Thousands and thousands of employees, and I've told clients to tell people this when new hires are pushing back on it, because I've had people making $30,000 a year try and get us to make massive changes to the [INAUDIBLE].
Name a company and if they're our client, the CEO has signed that [INAUDIBLE] without any changes. So this person should be signing it without any changes. There are certain things that should just be non-negotiable. You can negotiate salary. You can negotiate vacation entitlement. But those substantive terms and conditions, the [INAUDIBLE], how the termination clause is drafted, all of that, that should just be a boilerplate, off the shelf. And you can tell them every single employee has signed this piece of paper. This is the standard. This is the offer. Any questions before we move on to employment standards? Yes?
ALLISON DI CESARE: Very. So the last topic we're going to talk about is termination. So I will talk about that. But yes, in almost all cases, you should be getting a release.
AUDIENCE: Is there any benefit to having a promotion letter or a salary increase letter if you're pretty confident that the employee [INAUDIBLE]?
ALLISON DI CESARE: It's really just creating a paper trail. But a simple raise, I mean, I have some clients who like to do it because they're very meticulous about having a very clear paper trail that goes on and on. But you don't need it. You don't need a letter that documents a raise.
AUDIENCE: We definitely want a letter. I'm just wondering [INAUDIBLE].
ALLISON DI CESARE: You certainly can. Sometimes it can turn employees off because they're saying, are you trying to pull the wool over my eyes? What's going on here? So if you're confident they're already on a good one, the latest one, there's no reason to do a whole new agreement. If it's old, it's on a non Osler form, again, you should.
SUMMER DANAKAS: OK. So I will try to run through these fairly quickly. I'm aware of time. And our last section is termination, which is quite important. So most of these are quite straightforward. But as Allison's mentioned before, compliance with employment standards legislation in Canada is generally a complaint based system unless, as Allison mentioned, you can be subject to random inspections and things like that. But otherwise it's generally based on employees making complaints.
So obviously generally, the happier your employees, the less likely they are to complain. That being said, we've seen situations where it just takes a single employee to put up their hand and say, I think I'm supposed to be getting overtime and I'm not getting it, and then suddenly, oh, the other employees sort of jump on board and now what started off as sort of just a small issue can actually turn into quite a material and significant risk for the company.
ALLISON DI CESARE: Or even if the employees don't jump on board, the ministry looks at this person and then writes you a letter saying, do you have anyone else who's in this role? And then suddenly they're saying, oh no, you're getting an order to pay for 30 people and that one person.
SUMMER DANAKAS: Exactly. So for that reason, it's sort of important to be aware of these key areas of compliance and trying to avoid areas of risk. Generally minimum wage is an obvious one. Everyone gets it. It's based on each hour worked. So just be aware of situations where, for example, you have a salaried employee who's making $30,000 a year but is working a 44 hour week. Now all of a sudden you're non-compliant because they're actually making less than minimum wage. So something to be aware.
Overtime. This is one area of compliance that we're increasingly dealing with and having compliance issues come up. In Ontario, all employees are required to receive time and a half for all hours worked in excess of 44 hours a week to a maximum of 48 hours per week. And employees who are not exempt, and we'll get to that in a second, cannot be required to work more than 48 hours a week even if you're paying-- sorry, whether or not you're paying them overtime for it. So that's number one. And number two, if they're not exempt, they're most likely going to be eligible for overtime. And there is an obligation to pay overtime, as I said, for all hours worked in excess of 44 hours.
That being said, there are a few categories of employees that are considered exempt such that the overtime and hours of work rules don't apply to them. Those being generally outside salespersons, managers and supervisors, but importantly, job title alone is not determinative. They need to be genuine managers and genuine supervisors. And IT professionals. This is a tricky one. It's an under-theorized area of the law. Unfortunately, there's not a lot of helpful case law to sort of define exactly what is an IT professional. But generally, based on the ministry guidelines, it's to the effect that it's anyone who's responsible for the development or the maintenance of the company software or information technology. And those individuals would be considered exempt under the IT professionals exemption.
ALLISON DI CESARE: So the market is that people consider developers to be exempt. The market in the industry. But if you're a big enough company that you have an IT guy who's just troubleshooting, they're not an IT professional. They're not developing. They're not using professional expertise.
SUMMER DANAKAS: So key takeaway, unless they're one of those three, and again, sometimes it can be hard to know whether they're one of those three, no matter how much they get paid, no matter whether they're salaried or hourly, they're most likely going to be eligible and entitled to receive overtime.
Human rights. Another area that you especially want to make sure you're compliant with. All employees have the right to freedom of discrimination and harassment in the workplace. Also companies have a positive obligation to accommodate all employees with disabilities to the point of undue hardship.
It's a tricky area, particularly with human rights. It makes things like the idea of fit, of terminating people for performance issues or not being compatible with the culture of the company, it can make those things tricky. Also when you're hiring people, things like hiring someone because maybe they're a little bit older and generally the culture of your company is a younger group of people. Not hiring someone because they don't drink and your culture is one where going out and socializing at bars is an important part of what you do, but the reason that individual doesn't drink is due to their faith, that's discrimination.
ALLISON DI CESARE: And that's a real life scenario that I've had twice.
SUMMER DANAKAS: So these are the types of things that when it comes both to the reasons you're not hiring someone or the reasons that you're letting someone go to be wary of the fact that those reasons could actually turn out to be discrimination under a protected ground of the Human Rights Code.
And then lastly, occupational health and safety. Generally in the startup environment and in office environments, the typical health and safety not as much of a risk area. Where it is is workplace violence and harassment, which is covered under both occupational health and safety law as well as the Human Rights Code. And it can have material consequences for the company, not just from a compliance standpoint or monetary damages but also reputational damage. Investors can often be quite concerned when there's been material harassment issues.
So something that you definitely want to be aware of and something that you will probably most likely deal with at some point. It may not be a significant or very large issue, but even smaller scale issues because harassment is often very subjective. It's sort of in the eye of the beholder. And so it makes it something that you're likely to deal with given how broadly defined harassment is. So absolutely critical that you have a workplace violence and harassment policy in place that covers training and investigation of harassment.
ALLISON DI CESARE: Yeah. So we're running out of time, but the last thing I'll say on harassment is, yes, you're required by statute once you have five employees to have a written workplace violence and harassment policy. You're required to investigate all incidents and complaints of harassment, even if someone doesn't complain to you. If you know about something, you've heard it through the grapevine, you've got to investigate it.
Again, and you can always reach out to us, we have tons of experience with this, but this is another one where if you go on the Ministry of Labor website, they have a very detailed, it's called the Code of Practice, on workplace harassment. And it's extremely helpful. Walks you through all of the requirements, how to put together a policy, how to conduct an investigation if you're in that scenario. It's a very helpful resource and one that we turn to sometimes as well.
And then my little one minute blitz on termination. I'm just going to cover the very, very key points. Number one, obviously terminations can be very difficult. They can be potentially costly. It should not be a rash decision. This should be something that you are always proceeding with carefully and methodically, getting your ducks in a row before you do it. Too often I have clients reach out to me and say, hey, we decided this morning to terminate so-and-so and we're doing it this afternoon. You're setting yourself up for failure.
You need to be looking through their employment agreement. You need to be considering what their legal entitlements are. You need to be considering is it for cause? Is it not for cause? You need to be considering are there any red flags here? In Ontario or in really, and we're setting aside Quebec because it's their own base, but in the common law provinces, you can pretty much terminate an employee for any reason except for a prohibited one. And there are some that I find the clients aren't too familiar with.
So if there is a scenario where you are terminating someone and they have recently complained about a workplace issue, such as harassment or safety or fraud I've had come up twice recently, alleged illegal activity, employment standards, you're not paying me overtime, if they've made any complaints about that, if they've been otherwise involved in an investigation, if they've requested some kind of accommodation, if they have a disability or they're the oldest person in the office or they're otherwise easily identified under a prohibited ground of discrimination. If they have recently taken any kind of leave of absence, sick leave, mat leave, parental leave, told you that they're going to take one, just came back from one.
There are a ton of reasons why the termination that would otherwise be run of the mill, hey, we're going to give them a little bit over their ESA in exchange for release, becomes extremely complicated, costly, and creates reputational risk. Not to mention for some of those, like the parental leave, so the human rights and the ESA issues as well as the OSHA, you could potentially be in a scenario where the employee had a reinstatement right. So another reason why you've got to go through this methodically if there's any red flags at all. And really in any termination at all, we do recommend that you reach out to us.
And then to address the question that was raised, yes, so our recommendation and what investors will expect to see is that for any employee, and really even if they were a probationary employee, if you are terminating them without cause, you prepare a full separation package. And we have templates we can give you and we can work with you on them. And they reinforce the restrictive covenants. They have a non-disparagement clause and they have a release. You want to get their release. But in order to do that, you have to give them more than their ESA entitlements. So for example, if someone's been around for eight months and their ESA is a week and they have an ESA only termination clause, give them two. Give them three. You've got to give them something more in order to make that release binding.
And then the final thing, once you've drafted it, is you meet with them in person, and sometimes there are scenarios where this is impossible, but an employer can be subject to damages just for how they handled the termination if it wasn't handled properly. You can be liable for damages if you caused mental distress because of how you handled it if they could have been reasonably foreseen. So it's basically if you're unduly insensitive or whatever high handed means, which is another term used in the case law. But it's a reason why we never, never, never recommend terminating by email. And I've seen clients do it.
Don't terminate by email. If you absolutely have to, if they're your only employee in BC, you've got no one out there, you can do it by phone. You call them. You walk them through it. You email them the package while you're on the phone. But it should be avoided. You should generally be having these meetings in person. And some of the do's and don'ts for how to do that are on the slide. And if anyone wants a copy of these slides, because I know for this in particular, we're kind of out of time here and I've really raced through it, we can send you the slides.
I think a couple of the key points that are out there is you should give employees a reason for why they're being terminated. Because if you just say this is a without cause, see you later, they will sometimes assume the worst. An information vacuum is not necessarily a good thing. But the reason should be short. It should be concise. It should not create an opportunity for a debate or for them to poke holes in what you're saying.
So a line that I use all the time is your performance hasn't met the standards and expectations of the company. After careful consideration, we've decided it's best part ways. That's enough and you can try and shut down any further follow up. Job elimination, other things like that. It just helps give the employee some kind of explanation that's not, well, I'm the oldest person in the office. That must be why I was fired. So I'm going to go to a lawyer now.
That's really the main thing. And then just walking them through the package in the meeting and then making sure they take it home and review it. They should never be allowed to sign it on the spot. Any final questions? I know we've got a little bit over. I'm sorry about that. Yes? So first you and then I'll go to you.
ALLISON DI CESARE: Sorry. So you've terminated them first and then they resign?
AUDIENCE: They resigned first.
ALLISON DI CESARE: And then you terminate early.
ALLISON DI CESARE: Yeah, so the court would consider that a termination. If they have a clause in their agreement that says they've got to give two weeks notice and you're like, I'm done with you after three days, it is. What you can do, though, generally and our clause would permit it is put them on garden leave. If you don't want them coming into the office or talking to customers or talking to clients, employees, you can say, great, your employment will end on that date, but we're going to send you home. And they'll be happy about that, because they don't have to do any work. No, you don't have to pay termination pay. You have to pay them out as if they were working.
ALLISON DI CESARE: The resignation date. The resignation. So if they say I'm giving you my two week's notice but you don't want them to work their two weeks notice, don't terminate their employment early. Just say, OK, great. Send them home. But you have to pay them for those two weeks. That's the very short answer to that question. It should be handled a little more methodically than that, but that's how it would be. That's the high level of how it would be done.
ALLISON DI CESARE: No, you shouldn't, because then you're setting yourself up for more liability.
AUDIENCE: Sorry, [INAUDIBLE] touched on commissions. But how are commissions [INAUDIBLE] on termination [INAUDIBLE]?
ALLISON DI CESARE: Yeah. Well, leave is a separate issue. If they're on pat leave, they're not going to be entitled depending on how your commissions plan is drafted. But generally if they're not working to earn commissions, they wouldn't be receiving commissions during that period in respect of work they would have done during that period. They might be getting paid for work they did before they left. But commissions and bonuses are two things, like termination clauses, that the courts scrutinize quite a bit.
One very important thing, again, is limiting liability on termination. Because if it's not crystal clear in the employment agreement and drafted again in a very nitpicky way that we've done in our templates, they are entitled to, and there are various ways to calculate it, but the commissions and bonus they would have earned during the severance period. Not only whatever was accrued up to the termination date. Whereas what we try to do in our agreements is say unless you're there on the day that it's paid, you don't get it.
ALLISON DI CESARE: Yeah. So it depends on the circumstances. There are varying court decisions on this. So the ESA does it one way. Although typically, just to say, if you were only giving someone their ESA and they're paid with commissions as opposed to a bonus, generally you would have to give them commissions for their ESA period. But it's typically a problem we avoid entirely by giving enhanced severance, which is always going to be better than just giving them their commissions. And then you don't have to go through figuring out that math.
But there is a look back period and it varies from province to province. Under common law, some judges, it depends. They might look at a previous year. They might look at an average of a couple of years. But it's the best way of figuring out. Because the principle is generally-- and that's what we're trying to contract out of, but the principle of common law is you pay them as if they'd continued to work during that time period. So whatever the best way is to figure that out, that's what they'd be entitled to.
AUDIENCE: [INAUDIBLE] If your main office is in Ontario and you have an employee [INAUDIBLE]?
ALLISON DI CESARE: Their own province. That's where things get messy, because you don't necessarily know as much about that jurisdiction, but it's based on where they're physically working.
AUDIENCE: So if you hire [INAUDIBLE]?
ALLISON DI CESARE: Very important, especially Quebec, which I recommend you avoid like the plague if you can. But if you have to have people in Quebec, really important that you educate yourself. And you can reach out to us on this. But Quebec has very-- it has union-like protections for employees. People who are around for over two years and you fire them without an equivalent of cause can get reinstated. It's a problematic jurisdiction for an employer standpoint. Yes, you and then you.
AUDIENCE: Just a little unrelated, I guess, to what we're talking about today, but an important issue we've been dealing with a lot this week at some company events and marijuana use. Is there any best practices you can share [INAUDIBLE]?
ALLISON DI CESARE: This is another two hour presentation.
AUDIENCE: What's just the high level answer to that?
ALLISON DI CESARE: I mean, the high level is cannabis should be treated like alcohol. That's my one sentence answer.
AUDIENCE: You mentioned you don't need a letter or a new contract for someone who receives a raise. So I was under the impression that if the title changes or [INAUDIBLE] changes in compensation, that's best practice to have a new contract in place. So when do you recommend [INAUDIBLE]?
ALLISON DI CESARE: If they are already on the latest and greatest template and all you're doing is giving them a raise, you do not need to put them on an entirely new employment agreement. You can send them a simple letter saying, we're giving you a raise of x. All of the terms and conditions of your employment will remain unchanged. You don't even need to do that, frankly, although it's a best practice that you do just to have a documented. If they're not on the latest and greatest employment agreement, that's a scenario where you put them on.
AUDIENCE: So thank you very much.
We're running overtime, but they'll stick around after. So free legal advice [INAUDIBLE]. To ask any questions. Hopefully they didn't scare you too much. And I'm sure there phones will be ringing off the hook in the next couple of days. Thanks again.
ALLISON DI CESARE: Thanks, guys.
SUMMER DANAKAS: Thanks.