Five Key Provisions in Employment Contracts

Carl Cunningham

Bennett Jones LLP

March 6, 2013

Financial Executives International

1. Benefits of Using Written Employment Contracts

2. Overview of Key Provisions in Employment Contracts

3. Protecting Confidential Information

4. Assigning Ownership of Intellectual Property

5. Restrictive Covenants

6. Notice of Termination Without Cause

7. Entire Agreement

8. Additional Considerations

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Topics

• Provides certainty and clear terms regarding

• administration of employment relationship

• how the employment relationship will end

• Protects employer's business from unfair advantage by departing employee

• Clarity regarding ability to modify terms

• confirm when employer may change

• Define "Good Reason"

• May limit termination costs for non-unionized employees

• Reduce unnecessary wrongful dismissal litigation

• removing the need for a court's assessment of reasonable notice

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Benefits of Using Written Employment Contracts

1. Protecting Confidential Information

2. Assigning Ownership of Intellectual Property

3. Restrictive Covenants

4. Notice of Termination Without Cause

5. Entire Agreement

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Overview of Five Key Provisions in Employment Contracts

What Constitutes Confidential Information?

• Information about the manner in which the employer's business is carried on which, if allowed to fall into the hands of a competitor, could be used to take unfair advantage

• Sales data, identity of suppliers, pricing structure, marketing plans, financial results, customer contact information, personnel contact information and compensation information

• Information relating to the product of the business

• trade secrets, formulas, special manufacturing processes

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#1 - Protecting Confidential Information

A confidentiality provision/agreement should: • define what constitutes confidential information

• limit or prohibit disclosure of such information both during and after employment

• establish a procedure for obtaining permission to disclose confidential information

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#1 - Protecting Confidential Information

• Starting point is that an employee is generally free to compete with his/her former employer and use the skills and goodwill he has acquired during his employment

• Restrictive covenants are a contractual term that places restrictions on post-employment conduct

• Non-competition clauses

• Restrict the employee's ability to work in or carry on a business activity that is competitive with the employer's business

• Non-solicitation clauses

• restrict the employee from soliciting the employer's clients and/or employees

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#2 - Restrictive Covenants

Do's and Don'ts

• Carefully consider whether restricting the departing employee from certain conduct is necessary and would be viewed as reasonable

• Does the employer have a proprietary interest entitled to protection?

• Is it appropriate for the nature of the position?

• Tailor the restrictive covenant to be narrow and specific

• e.g., non-solicitation agreements should only restrict contact with clients the employee developed a relationship with as opposed to all clients of the company

• Limit the scope (geographic and temporal) and type of activity that will be restricted

• may be appropriate to have a shorter non-competition period (e.g., 6 months) and a longer non-solicitation period (e.g., 12 months)

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#2 - Restrictive Covenants

Do's and Don'ts (continued)

• Consider identifying actual competitors (rather than a general non-compete provision)

• Consider whether the company will pay the employee for the duration of the restrictive period if the employee's employment is terminated

• Use clear and unambiguous language

• When hiring, employer should include a provision in the employment agreement that the employee confirms he is not bound by any restrictive covenant imposed by a former employer

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#2 - Restrictive Covenants

• In Ontario, absent a written agreement , the employee is entitled to the benefits of an invention (even developed on the employer's time with its resources)

• In contrast, under the common law, employers own the copyright in works created by their employee in the course of employment (photographs, drawings, software, music, text ,etc.)

• Proprietary information and invention agreements may contain provisions which :

• require the employee to list any inventions created before the current employment

• disclose inventions created during employment and assign title to the employer

• disclose works created during employment, and agree that such work is deemed to be the property of the employer, or

• require the employee to provide the employer with assistance in obtaining appropriate registration of inventions and works

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#3 - Assigning Ownership of Intellectual Property

• For non-union employees the Employment Standards Act, 2000 ("ESA"), provides

• notice of termination pay (0 to 8 weeks)

• statutory severance pay (5 to 26 weeks) if (a) the employee has at least 5 years' service and (b) the employer's payroll is at least $2.5 million per annum

• Common law requires an employer to provide reasonable notice of termination if:

• the employment contract is silent with respect to termination; or

• the termination clause fails to meet the minimum requirements under the ESA, or is otherwise invalid

• Reasonable notice is determined on a case-by-case basis

• position, age, length of service, inducement and ability to find alternate employment

• ranges from a low of a few weeks to a high of 24 months (or more in limited cases)

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#4 - Notice of Termination Without Cause

• Notice of termination provision in contract provides certainty

• Rebuts presumption of reasonable notice at common law

• Provides an opportunity to specifically address potential claims other than base/salary or wages

• group insurance benefits, bonus, commissions, stock options, pension, group RRSP

• absent an express provision, the employee is entitled to compensation in respect of all applicable benefits for the entire notice period

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#4 - Notice of Termination Without Cause

Sample Notice of Termination Provision – Entry Level

ESA Minimum

• The Company may terminate your employment pursuant to this Agreement, at any time, upon providing you with the amount of notice of termination or pay in lieu of notice prescribed by the Employment Standards Act, 2000 plus severance pay, if any, prescribed by the Employment Standards Act, 2000. In addition, the Company will make the benefit plan contributions necessary to maintain your participation for the minimum period prescribed under the Employment Standards Act, 2000 in all benefit plans provided to you by the Company immediately prior to the termination of your employment. No other compensation in lieu of notice of termination will be provided to you unless required pursuant to the Employment Standards Act, 2000.

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#4 - Notice of Termination Without Cause

Sample Notice of Termination Provision – Mid-Level

3 weeks per year of service

• The Company may terminate your employment pursuant to this Agreement, at any time, upon providing you with three weeks' notice or three weeks' pay in lieu of notice, for each year of service, up to a maximum of 52 weeks. In addition, the Company will make the benefit plan contributions necessary to maintain your participation for the minimum period prescribed under the Employment Standards Act, 2000 in all benefit plans provided to you by the Company immediately prior to the termination of your employment. No other compensation in lieu of notice of termination will be provided to you unless required pursuant to the Employment Standards Act, 2000.

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#4 - Notice of Termination Without Cause

Sample Notice of Termination Provision – Senior Manager/Executive

12 Months (Termination By Company Without Cause)

• The Company may terminate your employment pursuant to this Agreement, at any time, upon providing you with 12 months' notice of termination. In the alternative the Company may terminate your employment by providing you with (a) 12 months' salary in lieu of notice, (b) a pro-rata bonus payment up to the date of termination for the fiscal year in which the termination occurs, (c) an amount equal to one times the average bonus paid in respect of the two most recently completed fiscal years immediately prior to the fiscal year in which the termination occurs and (d) the continuation of your benefits for 12 months, save and except STD and LTD which shall cease at the end of the notice period prescribed by the Employment Standards Act, 2000. No other compensation in lieu of notice of termination will be provided to you unless required pursuant to the Employment Standards Act, 2000.

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#4 - Notice of Termination Without Cause

Example – 45 year old mid-level manager with 10 years of service

• ESA

8 weeks' termination pay and 10 weeks' severance pay (total of 18 weeks)

• Contract that provides 3 weeks per completed year of service

30 weeks' pay in lieu (inclusive of 18 weeks under ESA)

• Common Law

Range of approximately of 10 to 12 months (44 to 52 weeks)

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#4 - Notice of Termination Without Cause

• Bonus during the Notice Period

• Commonly litigated

• Very specific language needed to rebut presumption employee is not entitled to bonus during notice period. For example:

• "It is a term and condition of receiving a bonus that the employee be actively employed on [the last day of the applicable fiscal year/the day the bonus is paid]"

• Employee must receive notice of terms of the bonus plan

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#4 - Notice of Termination Without Cause

• Confirms the document represents the entire agreement of the parties

• Rebuts presumption of any additional verbal or pre-contractual representations

• Example:

• This Agreement constitutes the entire agreement between you and the Company with respect to your employment and cancels and supersedes any prior understandings and agreements between you and the Company with respect to your employment. There are no representations, warranties, forms, conditions, undertakings or collateral agreements, express, implied or statutory between you and the Company other than as expressly set forth in this Agreement. You hereby waive any right to assert a claim based on any pre-contractual representations, negligent or otherwise, made by the Company.

• NOT just "boiler-plate"

• Reduces risk of "tort" claims such as negligent misrepresentation

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#5 - Entire Agreement Clause

• Draft employment contracts in plain language

• Applicants must sign and return the contract before commencing employment

• a court could declare a contract signed on the first day of employment unenforceable based on duress and lack of consideration

• Case law has held that where significant terms of the employment contract have changed, the terms initially agreed on are not enforceable

• (e.g., a termination provision drafted for an entry level person is inappropriate and unenforceable 25 years later when that person has been promoted to a senior executive)

• Consider including a term which states that the contract will continue in full force, even in the event of promotions, transfers or reassignments

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Additional Considerations

• Consider providing a new contract or amending letter where there is a promotion, transfer, or other change to the terms of employment (fresh consideration must be provided)

• Employer policies may be incorporated by reference

• however, incorporation by reference could be unenforceable if the employee did not receive the policies at the time the contract was offered or the employee was given insufficient time to review

• best practice: key terms should be set out directly in the contract and changes to the policies must be communicated to the employees

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Additional Considerations

Questions?

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Five Key Provisions in Employment Contracts