Employment contracts, workplace investigations are some areas where employers can get tripped up
As we enter Spring, employers may not be feeling renewed optimism as is usually hoped at this time of year. Instead, I see many employers struggling with uncertain economic times and increasing costs of doing business. Costly employer mistakes often include those stemming from a lack of understanding of employer legal obligations. Even the most sophisticated employers understandably don’t get employment law right all the time.
So how much does it cost employers that get it wrong? And what best practices can employers use to minimize their legal exposures?
The good news is employers can course correct and mitigate many costs.
The most common costly employer mistake is an outdated employment contract, or not having one at all. The consequence is that an employee becomes entitled to much greater common law reasonable notice at termination, ranging from a low of three months to 24 months (or possibly more) of an employee’s total compensation and benefits.
Recently in Ontario, courts have awarded 26, 27, and even 30 months in exceptional circumstances. In my practice, I regularly see settlements in the tens of thousands of dollars beyond just an employee’s minimum statutory entitlements. Highly paid employees also regularly get settlements in the hundreds of thousands of dollars.
For employers that think they have good contracts, they must ensure experienced employment counsel has recently reviewed them. Particularly in Ontario, many employers are still playing catch up with case law to redraft their contracts. This is because Ontario courts render new decisions each year that invalidate termination clauses for very specific reasons, such as language that says an employer may terminate “at any time,” at its “sole discretion,” or “for cause without any notice.”
Employers also must think broadly about their contracts, as if any language potentially violates employment standards legislation elsewhere in their contract or an offer letter, it must be revised. Further, employers should ensure they implement contracts correctly, including that they are signed a week in advance of a start date.
Even with the best contract language for new hires, most employers carry termination liability for more tenured employees who remain on outdated contracts. This is one of the biggest and most hidden costs for employers.
Going forward, the best cost-saving strategy for employers is ensuring contracts have up-to-date termination clauses. With legal advice, employers can also strategically update their contracts for existing employees.
Over the last few years, there has been an increase in class actions and individual claims against employers that don’t properly pay vacation pay, and other statutory entitlements such as holiday pay and overtime pay. The fallout can be greatest when one individual claim spirals into multiple claims or even class actions, going back potentially many years for underpaid vacation pay. While individual claims can be tens of thousands of dollars, class actions often result in employer liability in the millions of dollars.
Employers are obligated to at least comply with minimum statutory vacation pay requirements. Employers may also have greater contractual entitlements owed to employees. The precise way to calculate vacation pay varies by jurisdiction.
For example, in Ontario, vacation pay of at least four per cent or six per cents owed on all “wages” an employee earns in a vacation entitlement period, which includes not just salary but also non-discretionary bonuses, commissions, holiday pay, overtime pay, paid domestic or sexual violence leave, termination pay, and allowances for room and board. One of the biggest areas of risk for employers is when they don’t pay vacation pay on bonuses that are, in reality, non-discretionary and captured within the Ontario definition of “wages.”
To minimize legal exposures, employers must first understand whether they are correctly paying vacation pay, along with other statutory requirements, in each jurisdiction of operation. Then, with legal advice, employers can strategically pay for historical underpayments and/or adjust their practices going forward. Employers should further consider whether their bonus clauses or plans and related communications clearly support bonuses being discretionary, to try to avoid claims for underpaid vacation pay.
I often see wrongful dismissal claims and employee complaints alleging employers did not take harassment or discrimination complaints seriously. When part of a wrongful dismissal claim, the amounts claimed are usually tens of thousands of dollars as moral or punitive damages. The consequences for employers can be even greater if employees make reprisal complaints and seek reinstatement to their jobs and back wages.
Across each jurisdiction, employers have very specific workplace harassment and violence obligations, as well as discrimination investigation obligations. In Ontario, for example, employers must investigate harassment as confidentially as possible and inform a complainant and respondent of the results of the investigation and any corrective action in writing. Employers also must investigate fairly and impartially.
Not infrequently, employers mistakenly believe that if an employee has not formally made a complaint of harassment, there is no duty to investigate – this is wrong, as if an employer becomes aware of an incident of harassment, it must investigate. For example, an incident of harassment could have been witnessed by other employees who tell a manager, be written in a performance review, or be palpable through tense employee interactions.
Employers should ensure their harassment policies not only comply with their statutory obligations, but also describe investigation steps that must be taken. Internal guidance documents and training can also help business leaders know when an incident may be considered harassment or discrimination and how to best conduct an internal investigation, to avoid costly external investigations wherever possible.
Business needs can change very quickly, and unplanned terminations are an unfortunate reality for many employers. Whenever possible, planning for terminations ahead of time can save employers money and limit the risk of litigation. Particularly in Ontario, recent court decisions show an upward trend in moral and punitive damages for employers that improperly conduct terminations, ranging from $10,000 to $55,000.
The below are examples I’ve seen in my practice where employers could have paid significantly less:
Every termination is different, yet by complying with legal obligations and being proactive, employers will save themselves tens of thousands of dollars, if not more. Whenever in doubt, quick legal advice is often worth it.
By course correcting in the above four key areas, employers of all sizes and industries will save themselves money, time, and reputational harm, and regain optimism for the future.
Ioana Pantis is a partner practicing management-side employment and human rights law at McMillan LLP in Toronto.
