Introduction:
Finding the best employees is fundamental to start-up companies. Bryce Tingle has noted in his book Start-up and Growth Companies in Canada - A Guide to Business and Legal Practice that "a new company's success is primarily a function of future managerial decisions, unlike more established companies where most income is derived from existing businesses." [1] Employees in a start-up company will see significant change in the nature and character of their work as the company progresses. [2] For example, a small food-preparation start-up might begin with two founders. They may have limited tech knowledge and may bring on an individual with coding knowledge. That individual may later be required for more of a business development practice as they become more familiar with the running of the business. A constant movement of various people in the firm as responsibilities change will have an effect on how an employment agreement is written.
 
Some general considerations of employment with start-up companies:
1. Keeping the description of job duties of an employee in a contract of employment as general as possible can help avoid issues down the road with respect to changes in job duties as hinted above. It can be mentioned that due to the corporation's expected growth, responsibilities of an employee will change from time to time. [3] Unanticipated changes in employment responsibilities can constitute constructive dismissal, and because changes are reasonably foreseeable in a growth company, a contract clearly providing for an employer's power to change an employee's position from time to time is important. [4]
 
2. The goal for a start-up should always be "no surprises". [5] To avoid issues down the road including an "integration clause" stating that the documents represent the entire agreement regarding the employment relationship, and terms cannot be modified except in writing executed by both parties is important. [6]
 
3. As in any contract, consideration is required. Canadian courts have viewed arrangements where an employee signs their formal employment agreement on their first day of work as unenforceable. This can happen where that person was first sent an informal "offer letter", or general job description, and later formally signed at work. [7] Rather, an employment agreement entered into as a condition of a prospective employee being offered employment is enforceable. The consideration is the employment. [8]
 
4. On a general level, Canadian courts are strongly sided towards employees rather than companies. This might be more intuitive in the sense of big multi-national corporations "taking advantage of the little guy". However, for a start-up, being sued by an employee can be heavily detrimental, if not crippling to, a company's survival. It is vital to ensure that employee agreements are well-written and thought out. The BLG Business Venture Clinic can be a useful service for early start-ups considering and contemplating the drafting of employee agreements, and various clauses within such as rights of first refusal, piggyback rights, shotgun provisions and others.
 
Nielsen Beatty is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.

REFERENCES:
[1] Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018) at 126.
[2] Ibid at 127.
[3] Ibid.
[4] Ferdinandusz v. Global Driver Services Inc. [1998] O.J. No. 4225, 5 C.C.E.L. (3d) 248 (Ont. Gen. Div.).
[5] Tingle, Start-up and Growth Companies in Canada at 127.
[6] Ibid.
[7] Ibid at 128.
[8] Buaron v. Acuityads Inc., [2015] O.J. No. 5045 (Ont. S.C.J.).

Hiring your first employees is a major step for a young business, one that comes with a new set of new legal challenges and risks. This blog will discuss some of the major legal pitfalls in hiring. Note that this post doesn’t discuss the contractor/employee distinction (which is also very important) because that was covered in a previous post by Sunny Uppal on April 21, 2019.

Don’t Try This at Home
Employment law did not develop with small startups in mind. It emerged at a time when low-paid industrial workers needed protection from massive industrial employers, and it shows. Employment law generally assumes that employers have the upper hand in bargaining power and fairly deep pockets.
For startups, this means that you should always obtain legal information or advice before proceeding with your first hiring. Attempting to draft your own employment agreements (or not using written agreements at all) is walking blindfolded into a minefield of legal issues. Even lawyers have difficulty drafting some provisions to be enforceable, but they can at least assess risks and steer away from the more dangerous areas.

Get it in Writing from Day One
Handshake deals are common in the business world, and while lawyers are generally wary of unwritten agreements that is doubly true in the employment context. The problem is, absent a written agreement, a contract is “deemed” to arise regardless of the parties’ intentions and the terms of that contract will be decided by statute or by the courts.[1] As an employer, these deemed contracts will rarely be preferable to a written agreement and can create uncertainty and risk.

The other issue with these unwritten agreements is that any later written arrangement is treated not as a new contract, but as a modification of the existing contract that arose when the relationship began. This creates a problem of consideration: the legal concept that if a contract is to be enforced in court, it must be an exchange of meaningful value between parties. The problem in this case is that the later agreement can be treated as a modification of the old contract, so if nothing new is being offered then the court will use to the old contract instead.[2] Consider the following example: Jessica hires her friend Dave to do some bookkeeping for her without a written agreement. As the business grows, Jessica begins to look for financing but investors want to see papered employment agreements, so she asks Dave to formalize their relationship in writing at the same pay, hours, benefits, etc. In this scenario, the second contract is likely void for lack of consideration since Dave is providing a benefit to Jessica (a written contract for her investors) but receiving nothing in return except for the benefits he already receives under the old contract. This means their relationship is still governed by the unwritten contract, including the terms that arise by operation of statute or common law. It is important to get employment agreements in writing from the start, to avoid unwanted terms.

All That is Written is not Gold
While it is important to get employment agreements in writing, doing so doesn’t provide complete assurance that the written terms will be enforced. A major area of concern for startups is the possibility that an employee will start a competing business: startups often have low barriers to competition, so it is important to set up proper protections that will be enforceable.

A common tool to this in is the non-competition clause, or “restrictive covenant”. The idea is to prevent a former employee from becoming a competitor by setting up a competing business or going to work for a rival, using the experience they gained as an employee against the employer. While common, non-competition clauses are a tricky area of law. The Supreme Court has been reluctant to enforce such clauses on the grounds that they make it difficult for employees to find work in their area of expertise, which imposes a burden on their ability to earn a living[3]. This means that non-competition clauses require careful drafting, and even then it is wise not to rely on them entirely.

Another way to protect yourself from competing against a former employee is to include strong intellectual property provisions into the employment contract that prevent the employee from wielding the knowledge they gained during their employment against you. Either way, seeking the proper legal assistance is critical.

Kevin Lee is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.

REFERENCES
[1] Employment Standards Code, RSA 2000, c E-9; Kent v Bell, (1949) 4 DLR 561.
[2] Greater Fredericton Airport Authority v NAV Canada, 2008 NBCA 28.
[3] J.G. Collins Insurance Agencies v Elsley, (1978) 2 SCR 916.