Currie Law – Employment Law, Criminal Law, Civil Litigation in Mississauga, Oakville, Milton, Campbellville, Georgetown, Hamilton, Burlington and the Niagara Region

Are you thinking of leaving your employer and hope to take your clients with you? Sometimes such behaviour can result in a legal action. Nothing infuriates a company more than a former employee taking away its most important asset.

In some proposed employment contracts and in many termination proposals, there is a clause prohibiting an employee from working for certain alternate Companies in the industry for a certain period of time in a certain geographical location. These are called non-competition clauses.

Many lawyers and some judges for the Courts look at these kinds of covenants as generally void, except in exceptional circumstances. Many lawyers will counsel an employee to sign such a clause at the time of employment or termination stating that “they’re not worth the paper they’re written on”.

BEWARE!

While Courts were predisposed to throw out many of these cases stating it was unfair to preclude an employee from making a living and citing public policy against such a restraint of trade, it may be that the tide is turning on whether or not a Court will enforce these clauses. This is particularly so when the employee has sophisticated business acumen and has negotiated the contract prior to his employment or in the context of the termination.

Therefore when such a contract is presented at the termination of an employment relationship and has not previously been part of the employment contract, I would strongly counsel the employee to seriously consider the ramifications of signing such a clause and its impact on future job prospects.

A recent Nova Scotia Court of Appeal case found a 12 month restrictive covenant not to compete with the company or solicit their customers in mainland Nova Scotia, to be unenforceable for being a restraint of trade. While the Court found the geographical and temporal restrictions of the covenant to be reasonable, it struck down the clause because the facts did not justify “the most drastic weapon of a non-competition clause reasonably necessary to protect the interests” of the company in its trade connections.

In a more recently released Ontario case involving two insurance brokers working for an insurance company, the Court upheld the non-competition clause the employees had signed when starting with the Company that provided that for a period of two years following their termination, they wouldn’t conduct business with any clients of the agency they had serviced. Upon a change of management, the brokers became unhappy and resigned, moving to a new agency. Many of the insured clients transferred their business to this new agency. Their former employer was successful in its action to prevent them from approaching any customer and was also successful in an action against the new Company for inducing the breach of contract. The Court found that the restrictive covenants were reasonable in the circumstances and that because of the nature of the relationship between an insured client and his insurance agent, a simple non-solicitation clause would not have been sufficient to protect the company because the clients would be likely to follow their insurance agent without any solicitation. The Court further found that the restrictive clause was not contrary to public interest as it did not prevent them from earning a living in their chosen field and that the two year duration of the clause was reasonable.

ADVICE FOR EMPLOYERS

An employer, who has been damaged by an employee who has thwarted such an agreement, should consider taking action to prevent any further loss of business and to obtain damages for the loss as a result of the employee’s breach of contract.
An Employer should also seriously consider the ramifications of offering employment to a competitor’s former employee who is under a non compete agreement. It may be wise and save you legal costs in the future to ask applicants about the existence of any such agreement at the first interview and document the answers accordingly.

ADVICE FOR EMPLOYEES

Therefore, an employee should give serious consideration to the implications of signing an agreement that limits the options for re-employment following termination.

It is crucial to analyze any employment contract that you signed during the course of your employment or to consider the particulars of your position and situation to determine your rights. It is common to find any combination of non-solicitation, non-competition and confidentiality clauses restricting your ability to work for the competition or to solicit your previous clients in your new position.

Some of the considerations we’ll explore in an analysis of any restrictions which may govern when you leave employment include:

an analysis of any employment contract (written or implied) that governs your employment
whether any employment contract restrictions were drafted unreasonably or imposed on you improperly according to the law
Even if there is no formal contract in place, an employee may be prevented from soliciting prior clients to his new place of business. All employees have an unwritten duty of good faith and fidelity. This duty prohibits taking confidential information to use in competition against an employer and could continue to exist as long as that information remains confidential. Employees who have considerable control and responsibility in the Company and were likely in a management position may be viewed as fiduciaries. Such fiduciaries are under a very strict obligation to act only in the best interests of the company and not to compete unfairly after leaving.

RESIGNING EMPLOYEES

If you are considering leaving your position, you must provide reasonable notice of your resignation or face being sued for damages. By way of example, in a recent case, ( RBC Dominion Securities) in Cranbrook, British Columbia, a large group of employees left their position and took their client lists and financial records to Merrill Lynch and began soliciting business away from RBC. While RBC was unsuccessful in arguing that they had competed unfairly, it was able to recover some damages because the brokers had resigned without advance notice.

A case was recently released by the Ontario Court which provides an important message for an employee when presented with a severance offer by a company.

In this case, the employee relied on the advice of the Human Resources individual in the company that was severing him that the company was offering “a good deal”. Accordingly, because he had faced considerable legal expenses through a divorce, he signed the release without first consulting a lawyer. When he later discovered that he could have obtained a much better package, he sued the company, claiming the agreement he signed was substantially one-sided and should be set aside. The Court disagreed with the plaintiff, stating that he could have refused Human Resources’ advice and obtained legal representation, which would have confirmed that the available severance the Court may have awarded was considerably higher than that offered. While the Court recognized that the severance was less than what he could have received and was “unfortunate”, the Court relied upon the plaintiff’s signature on the release and dismissed his case.

The message is clear:

• A preliminary severance package is usually negotiable. It is important therefore to seek legal advice before signing your name on any release
• If your company has given you a limited time in which to seek legal advice, ask for more time or the opportunity to consult with a lawyer, or if the terms of the offer or release are unclear
• It is not easy to prove that your signature on a document has been coerced or that you have signed a document under duress or difficult circumstances.

Ontario lawyer, Maureen Currie, has been practicing law for 20 years and has assisted in negotiating employment contracts and resolving many cases of employee dismissal. She has extensive experience in Canadian employment law, including claims for:

• wrongful dismissal
• unfair dismissal
• constructive dismissal (unfair demotion or change in working conditions, including pay reductions)
• harassment
• bad faith discharge

and has been instrumental in negotiating reasonable and favourable severance packages.

Our firm has represented clients whose wrongful dismissal has been by way of:

• termination of employment with compensation being only that set out in the Employment Standards Act. We have found that employees are often entitled to many times more than the amounts set out in the Ontario Employment Standards Act
• termination for cause where actions did not warrant ending the employment relationship
• changing the working conditions or job description such that it amounts to constructive dismissal
• termination where the employer has not followed proper procedures in ending an employee’s employment

If you’ve been fired or laid off, or are about to be, we can help determine if you are entitled to compensation for wrongful dismissal and the proper legal steps to recover it. We can also review your severance package to determine if it is fair and reasonable. If you have been fired or dismissed from your job, you may have several important questions, such as:

• can your employer fire you?
• were you entitled to prior notice that you were going to be dismissed?
• can you get severance pay?
• can you sue for wrongful dismissal?

We can help answer those questions.

You should know that the Employment Standards Act protects employees who lose their job. You should remember that you may have two separate entitlements; first, your rights under the Ontario Employment Standards Act; and second, your rights under the contract of employment. Your contract rights may be greater than your rights under the Employment Standards Act – even if you don’t have a written contract. But regardless, your contract rights cannot provide a lesser benefit than the Employment Standards Act.

SEVERANCE AND OTHER PAY

Dismissals that require notice and severance pay

In wrongful dismissal cases, the employee is often entitled to severance pay greater than that set out in the Employment Standards Act. In this situation, the employee should consult with a lawyer experienced in employment law matters.

Unless it is specifically agreed that an employee will only be employed for a set term, the employer must give proper notice in order to lay off or end the employment relationship. The Courts try to take into account the financial blow the employee suffers by the loss of employment.

Notice or severance pay is not necessary if the employee’s misconduct or incompetence gives the employer “cause” to invoke summary dismissal. In that case, the employee’s employment can be brought to an immediate end.

Length of notice required

The length of notice required varies with each situation. Things that are considered in determining the appropriate length of notice are the following:

• the character of the employment
• the length of service
• the age of the employee
• the availability of comparable employment, having regard to the experience, training and qualifications of the employee
• the economic environment
• the manner in which the employee has been terminated

The reasoning behind these factors is to cushion the worker against the blow of unemployment, to recognize the worker’s seniority, to protect the employee who has been induced to leave a secure job to work for the employer, to discourage employers from handling terminations in an unprofessional manner, to reward the employee for good prior service and to penalize him or her for poor service and to reward employees in high status occupations.

We can assist you in determining what the appropriate severance package is in your circumstances.

We are available in the greater Toronto area including areas such as  Mississauga, Oakville, Milton, Georgetown,  Burlington, Hamilton, Grimsby, Saint Catherines, Niagara Region, Welland and others.

If you are in an area outside those listed, please contact us for more information.

If you think you’ve about to be fired or dismissed:

1. get legal advice before accepting a demotion or transfer that you think is not fair
2. get legal advice before signing or accepting a payment from your employer as full and final settlement, if you think you’re entitled to more. If you settle your claim with your employer, a Court may say you gave up your right to sue. You can take a reasonable time to think things over and get proper advice – even if your employer gives you an unreasonable deadline.
3. start looking for another job immediately. Even if you later sue your employer and win, you still have a duty to seek new and comparable employment right away. Keep an accurate record of your job search, including copies of your application letters and e-mails, plus any replies you get.
4. if you think you are fired because of your age, gender, religion or some other personal characteristics, you may have a separate claim under the Ontario Human Rights law.
5. talk to a lawyer immediately and learn how to protect yourself

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• Representation of both companies and employees in employment issues involving employment agreements, termination, harassment, wrongful and constructive dismissal
• Ongoing advice and assistance to Boards of Directors in matters concerning business decisions and liability
• Experience in analyzing and reviewing contracts of a commercial nature with clients to assess their protection prior to signing
• Representation of a major tobacco company on product liability claims and complex litigation arising from the use of tobacco
• One of the team of lawyers on behalf of Canadian tobacco companies who launched a successful constitutional challenge in Quebec involving advertising of the product and constitutional issues
• Retained by the manufacturer of an airplane on product liability and litigation matters and concerns
• Retained by an American heart valve manufacturer with respect to Canadian product liability claims

• Have you been demoted?
• Has your salary been adjusted?
• Have your working conditions changed?

You may have a case for Constructive Dismissal. Employers can fire employees in several ways. Your boss may say, “you’re fired”. Or your boss may fire you in a much more subtle way and the law recognizes this. For example, you may have been demoted without your consent. Your salary may have been reduced. Or your boss may have taken away many of your responsibilities and duties. If your employer makes any important change in your job without your consent, it may be constructive dismissal.

An employee can be constructively dismissed without the words “you’re fired” ever being uttered. A case for constructive dismissal most often arises when an employer changes the employee’s:

1. salary and benefits; or
2. job description and responsibilities (including a demotion); or
3. working conditions; or
4. location of work (transfer to another city).

In some situations, a demotion with no change in pay can be a constructive dismissal. If an employer has set out to make it difficult for an employee to perform employment duties, a case of wrongful dismissal may arise.

Not any change in employment, however, will amount to constructive dismissal. The changes must be seen as fundamental, severe, serious, unilateral and substantial – so as to result in the employee performing a job of a different nature than s/he was previously.

Each case turns on its own facts, so it’s important that a constructive dismissal situation be carefully reviewed with a lawyer experienced in employment law.

Delay

Delay can hurt the employee who is in a situation that might amount to constructive dismissal. If the employee waits too long in such a situation, the Court may see the employee as accepting (“condoning”) the situation. However, there are valid reasons for an employee to continue to work in a constructive dismissal situation:

• the employee may be attempting to minimize his or her losses pursuant to a common law duty to “mitigate damages”;
• the employee may be acting out of financial necessity while searching for replacement employment;
• the employee may be testing the suitability of the new arrangements on a trial basis; or
• the employee may genuinely accept the new conditions as forming part of the employment contract.

The Court will not determine an employee to have condoned the employer’s wrongful conduct unless the employee genuinely consents to giving up the right to sue. The test for condonation is the intention of the employee. The Court will consider whether a reasonable person in the position of the employer believed that the employee intends, voluntarily and without coercion, to give up his or her legal right to sue and agrees to the changed terms as forming part of the employment contract?

The Courts recognize that an employee should be allowed a reasonable trial period in which to assess the suitability of working under the new terms before condonation will be found.

TALK TO US FOR HELP

If the fundamental terms of your employment have been changed without your consent, or if you have been fired or laid off, or are about to be, we can help determine if you are entitled to compensation for wrongful dismissal and the proper legal steps to recover it.

• Numerous inquests investigating the circumstances of inmates dying while in custody
• Representation of a Group Home worker engaged in a restraint resulting in the death of a resident
• Representation of a psychiatrist in an inquest involving allegations surrounding the provision of psychiatric medication involved in a young boy’s death from neuroleptic malignant syndrome
• Representation of a physician investigating the propriety of medication prescribed preceding the death of a patient
• Representation of Children’s Aid during a lengthy inquest reviewing the circumstances of a child being strangled in a car seat

Employers and employees are often seeking ways to reduce their costs of business, maximize their tax deductible expenses or the potential expense associated with the termination of an employee. One of the strategies that are being increasingly utilized is to create what is known as “independent contractor” relationships with their workers, I would suggest that those companies and individuals considering this avenue tread carefully because inappropriately setting up such a relationship can expose the worker and the company to penalties, liability and a host of potential problems. But if you are thinking of structuring your work relationships in this way, you may find the information below helpful.

Employees are entitled to substantial statutory rights and protections. Those who choose to provide their services by way of independent contractual relations are not generally entitled to the same protections as employees. While the employee “serves” the employer, the independent contractor provides a “service”. The independent contractor relationship must be delineated from that of a “term contract employee” who serves the employer but only for a limited term. The Courts have criticized paper “independent contractor relationships” as a mode of dismantling hard-won employment protections over the last century.

The benefit to the independent contractor is the ability to deduct, as business expenses, sums related to their earning a living, which are not available for deduction by employees, the ability, based on their bargaining power, to set their own fees, and their avoidance of payment for the social safety net, apart from taxes and the CPP contributions required by law. It appears that workers are often very enthusiastic about avoiding such costs – until they need to call upon the social safety net themselves.

SUBSTANCE AND FORM IN THE DETERMINATION OF STATUS

One can’t simply call an employee an independent contractor to set up such an arrangement! Thus, a written contract merely stating that the individual is an “independent contractor” is not determinative of the issue. Courts are instead keen to determine the true substance of the relationship. That’s not to say that a contract written by the parties and the title given are of no significance. What it does mean, however, is that these are pieces of evidence rather than determinative factors. (For example, if a contract between a worker and company states that the worker is an independent contractor and contains the indicia of independence, such as non-payment of expenses and the ability to work elsewhere, the Court or Government bodies will look closer at the day to day realities of the situation. If the worker occupies an office in the workplace, has no expenses, has no other clients and is under the direction and control of a company supervisor, these daily realities may determine the status of the worker as an employee – not the statement of “independent contractor” noted in the contract.)

LEGAL TESTS

The case law is replete with “independent contractors” who, upon termination of the relationship, file for Employment Insurance or commence a wrongful dismissal claim alleging that he or she was, in essence, an employee – regardless of any written contract to the contrary. In those cases, the employers find themselves facing a bill for arrears of EI and CPP premiums, secondary liability for taxes not withheld, interest and penalties, plus potential significant termination costs, either at common-law or by statute.

A number of tests have successfully been used to assist in a determination of whether the contract is one “of service” or “for services”. The first test utilized by the Courts was whether a worker was under the control of the employer or was responsible for him or herself.

Control Test

This issue concerns the level of control exercised by the company over the worker – meaning who determines where, when and how the work is to be performed. The more control the company exercises over the manner in which the worker performs his or her function, the more likely the Court is to find the relationship is one of employment. Less control is more likely to mean an independent contractor relationship. Control includes such matters as reporting relationships, discipline, the performance appraisal process and the fixing of hours and location of work.

But beware: a worker over whom less day-to-day control was necessary or possible but who nevertheless uses the equipment of the employer and had neither chance of profit or risk of loss is generally held to be an employee, regardless of the absence of direct control.

Fourfold Test

It’s been suggested that a Fourfold Test would, in some cases, be appropriate involving:

• Control
• Ownership of tools
• Chance of profit
• Risk of loss

In Jaremko v. A.E. LePage, a commissioned salesperson who was subject to the company’s policies, discipline and its promotion process, was held to be an employee – despite considerable day-to-day freedom.

Integration or Organizational Test
Grafted onto the Fourfold Test referred to above, is this test. The Courts state it this way:
“Where the worker’s work is integral to the business, it’s difficult for the worker to be an independent contractor (e.g. a salesman whose sales made up a large percentage of the company’s total sales was held to be an employee, because his sales were integral to the business). Those who provide IT services, short-term consulting services or security services are often considered to be independent contractors.”

Four-in-One Test

Over the years, other factors have been considered in determining this issue, such as whether the parties had a previous employment relationship, whether the worker was offering his or her own service or that of the company, and what the “total relationship” was.

All of these tests, taken together, are in essence directed towards determining “whose business is it?”

Tests are like a prism, each facet of which reflects the light slightly differently, so that when each reflection is combined with the others, an overall picture is created for the adjudicator to determine whether the worker is true independent and entitled to the benefits of independence, or deserves the protection of employment status.

CONTRACT ISSUES

Both independent contractor relationships and employment relationships are contract relationships. Many employees have a contract with their employer. It would be rare, however, to find an independent contractor or company who does not expect a formal agreement in an independent contractor situation. In such contracts, the worker is specifically stated to be an independent contractor, and responsible for G.S.T. and taxes is allocated to the contractor. Express termination and proprietary provisions commonly appear.

Another difference between employment and independent contractor agreements is the treatment of briefer severance/notice periods.

In theory, statutory obligations (the Employment Standards Act) which affect employees, have no impact on independent contractors. However the nominal characterization of a relationship as independent is insufficient to prove the point. If your worker is found to be an employee, various regulatory regimes will come into play:

Income Tax Act

Employers are required to deduct income tax at the source from the wages or salaries of their employees. Independent contractors are not subject to deductions at source and in addition, have the benefit of taking significant deductions to which the employees are not entitled. Thus, Revenue Canada always has a significant interest in this issue.

If it’s found that a worker is an employee under the Income Tax Act, the worker is responsible for paying all resulting back taxes, and many of his or her expenses may be disallowed. Interest and penalties will also ensue. However, the company can also be penalized for failing to properly withhold income tax. Liability is up to the amount the employer should have withheld from fees or wages, plus a 10% penalty, which increases to 20% on a second violation.

Employment Insurance and Canada Pension Plan

These two regulatory regimes come into play when a worker who is nominally an independent contractor has his or her relationship with the company terminated. Employment Insurance is the more significant because it provides benefits which, as an independent worker, the worker has ostensibly excluded from his or her working life altogether.

Employment Insurance is funded through employer and employee contributions. If an independent contractor files for benefits, benefits will be granted if the Employment Insurance Commission is of the view that the work constituted employment. Once this occurs, employer liability for its share of the premiums and for sums not deducted at source is assessed, and levied against the employer.

Both the employee’s entitlement to Employment Insurance and the employee’s liability for these changes are ultimately adjudicated before the Tax Court. If the individual is held to be an employee, the employer is liable for its contributions and the deductions it ought to have taken, as well as a 10% penalty on these amounts, increasing to 20% for a second offence, plus interest. Directors are jointly and severally liable with the corporation for these amounts. Prosecution, with penalties including fines up to $5,000, imprisonment for up to 6 months, or both, is also contemplated by the Act.

The Canada Pension Plan has two functions: the provision of retirement income and the provision of disability income to those who are disabled but younger than retirement age. Unlike Employment Insurance, all those who work have coverage. Independent contractors are responsible for contributing to CPP at the full rate, whereas employees are responsible for half only, paid by source deduction. The employer is responsible for the other half.

The employer is responsible for the entire amount it fails to withhold and remit, plus the aforesaid 10% or 20% penalty and interest. Directors are liable for premiums, penalties and interest but only where the company fails to pay. Failure to deduct and remit premiums is an offence punishable on summary conviction by a fine of up to $5,000 or imprisonment for up to 6 months, or both.

EMPLOYMENT STANDARDS ACT

Employment Standards legislation governs hours of work, overtime, minimum wages, holidays, vacations, various kinds of leaves, notice of termination and, in some cases, severance pay.

True independent contractors do not have the benefits of protection set out in Employment Standards legislation. However, if an independent contractor is held to be, in reality, an employee, and has not received vacation pay, termination/severance pay, or appropriate overtime pay, the employer is liable.

Contracting out of Employment Standards legislation is prohibited and consequently a provision which provides for less notice than an employee is entitled to under the legislation is void if the worker is found to be an employee. For the same reason, an independent contractor in name who is an employee in substance is fully entitled, despite the contract, to seek to enforce Employment Standards legislation against the employer in appropriate circumstances.

CONTRACTS TO SET UP INDEPENDENT CONTRACTORS

Creating an appropriate contract for an independent contractor is important. As noted previously, it is simply not sufficient if the parties state that it is their intention that the relationship be one of independence. The contract must be properly written and reflect an underlying relationship which contains the elements of independence. Moreover, compliance with the contract is required; Courts look to substance rather than form and a formal contract which is entirely ignored in practice will have little or no evidentiary weight.

DO’s & DON’Ts

If you make the decision that you want to attempt to create an independent contractor agreement, you should:

• Require the contractor to submit bills for services (as opposed to providing the contractor with a guaranteed sum or fixed retainer)
• Permit the contractor to hire employees and sub-contractors if necessary;
• Include an express termination provision in the agreement;
• Provide obvious and sufficient consideration for entering into an independent contractual relationship;
• Clearly sever a prior employment relationship before entering into a contractual relationship with that individual. If at all possible, allow a period of time to run between the end of the employment relationship and the beginning of the contractor relationship;
• Ensure that the contract is for a definite term or task. Bear in mind that indefinite term contracts are more common in employment relationships;
• Clearly state in the contract that it is an independent contractor relationship and not an employment relationship;
• Obtain an express acknowledgement from the contractor that the company will not be deducting or remitting any amounts for statutory obligations from the contractor’s fees;
• Obtain an indemnity from the contractor for any taxes the company is required to repay the CRA in connection with the contract;
• Clearly state that the contractor does not have the authority to enter into contracts on behalf of the company, or bind the company in any other way, without its express written authority;
• State that the contractor is free to provide his or her services to others. Any limitation in this area, including a requirement that the individual pre-screen potential clients with the company, will be evidence of an employment relationship or at the very least, of a dependent contractor arrangement – which doesn’t protect you;
• Require the contractor to obtain a G.S.T. number and to charge and remit G.S.T.
• Require the contractor to provide proof of Workers’ Compensation coverage or insurance in lieu of that coverage.

YOUR COMPANY SHOULD NOT:

• Exert control over the contractor’s hours of work, vacation time or the manner of performing his or her duties;
• Allow the contractor to use company stationery or business cards;
• Supply the contractor with a permanent work station or office. If the individual must be provided with work space, consider charging the individual rent for this space;
• Allow the contractor to use company equipment or company employees as assistance. Telecommuters should pay their own computer and office equipment including software, fax machines and telephones;
• Require the contractor to comply with company policies and discipline procedures. The company can require all companies which it contracts to comply with its harassment policies as they relate to their interactions with the company’s employees and customers;
• Set quotas for the contractor or prohibit the contractor from soliciting his or her own clients;
• Provide the contractor with T-4 slips;
• Subject the contractor to company supervision or performance reviews;
• Refer to the contractor as an employee or member of the “team” to provide him or her with a title (either internally or externally);
• Set commission scales or salaries for contractors. Instead, an hourly, daily or project rate should be negotiated with the contractor;
• Label as an “independent contractor” a commissioned salesperson who receives the majority or all of his or her income from the sales of the company’s products, unless factors support such a designation;
• Insert a non-competition clause into the contract, unless absolutely necessary for the company’s protection. Non-solicitation and confidentiality clauses are less indicative of an employment relationship;
• Restrict the number and/or types of clients to whom the contractor may provide services or require pre-screening of the contractor’s clients; and
• If the contractor is with a company as opposed to a specific individual, stipulate which employee of that company must provide the services.

In my practice I strongly caution workers and human resource professionals to take a very close look at the situation with the above factors in mind and to obtain legal advice and expertise to draft the contract before entering into this type of relationship.