Legal Considerations for Employees and Start-up Companies

Legal Considerations for Employees and Start-up Companies
Written by: Ali Sarhill
 
It is contended that a new company’s success is primarily attributable to future managerial decisions, unlike established companies where most income is derived from existing business.[1] As such, the value of employing superior employees to start-ups is, arguably, substantially higher than for established companies. Thus, an overview of some potential employment issues may encourage start-ups to pay closer attention to employment matters with their counsel.
 
Areas of Potential Employment Issues for Start-ups
 
Employment agreements
As changes to responsibilities of employees can frequently occur in a start-up company, employment agreements used should broadly describe job duties. They should also express that job responsibilities may change from time to time due to the corporation’s expected growth.[2] This is crucial as Canadian courts have found that constructive dismissal occurred due to changes in an employee’s work duties.[3]
 
As benefit plans and office policies are likely to change in start-ups over time, they should not be specified in the employment agreement.[4] To assist companies in establishing consideration for various agreements, the employment agreement should explicitly reference these separate agreements that comprise the entire contract of employment: stock option agreement, share subscription agreement, non-disclosure and non-competition agreements, and any assignment of technology.[5]
 
Crucially, the employment agreement should include an integration clause - that the documents in question form the entire employment agreement and that terms and conditions can only be changed by both parties in writing. Such a clause prevents an argument that some oral interactions are terms of the employment agreement.[6]
 
The employment agreement and other contracts should be given to the employee at the time employment is offered to the employee. The employee should, in writing, also be encouraged to seek independent legal advice. Doing so would support a court enforcing the employment agreement. Otherwise, if the employment agreement was signed on the employee’s first day of work, courts will not enforce such an agreement, without additional consideration being provided.[7]
 
Termination of employees and independent contractors
When an employee is terminated, the corporation is required to pay the employee a certain amount of money, also known as “notice”, if they were terminated “without cause”. This is often the amount of money they would have made, had they continued to work the “notice” period.[8]
 
The amount of notice that an employee is entitled to is determined by reference to the relevant province’s Employment Standards Code and the common law. Judges often rely on common law cases and determine that an employee is entitled to much more notice than under legislation, based on an estimate of what the employment agreement implicitly provides for. To avoid courts finding that an employee is entitled to more notice than what was given, an explicit provision that sets out the notice period and severance amounts should form part of the employment agreement.[9]
 
A written contract stating that an independent contractor is not entitled to any severance payments should be prepared, as courts are likely to impose a notice period if such a written contract does not exist. This is especially true if the company is asserting control over the contractor, where the contractor worked mostly exclusively for the company, and where the contractor’s and company’s businesses are tightly integrated.[10]
 
Ali Sarhill is a member of the BLG Business Venture Clinic and is a 3rd year student at the University of Calgary Faculty of Law.
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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 [Tingle].
[2] Ibid at 127.
[3] see Ferdinandusz v. Global Driver Services Inc. [1998] O.J. No. 4225, 5 C.C.E.L. (3d) 248 (Ont. Gen. Div.).
[4] Tingle at 127.
[5] ibid at 127.
[6] ibid at 127.
[7] ibid at 127-128.
[8] ibid at 128.
[9] ibid at 128-129.
[10] ibid at 130-131.