November 03rd, 2020

Employment Agreements
One of the keys to a successful start-up venture is hiring the right employees. An important part of the hiring process involves drafting an employment agreement. A good employment agreement provides a written account of the agreement between the employee and the Start-up and affords the parties a clearer understanding of their duties, responsibilities, and obligations to each other in their employment relationship. Here are some key issues to consider when drafting a strong employment agreement:

​Consideration is Important:
An employment agreement is a contract, and all contracts require consideration. An employment agreement entered into as a condition of the individual being offered employment is enforceable, whereas an employment agreement enter into once the employee has commenced work must be supported by fresh consideration.[1] As such, it is very important that an employment agreement and any ancillary contracts be given to an employee candidate as part of the offer of employment, failing to do so may leave the employment agreement unenforceable.[2]

Keep it Simple:
Life at an early-stage start-up can be turbulent, employees will likely encounter changes in the nature and character of their work as time goes on. In light of this, the description of the job duties found in your start-up’s employment agreement should be kept simple and general as possible as courts have been willing to rule that unanticipated changes in employment responsibilities can constitute constructive dismissal.[3] Having the employment agreement expressly provide for the employer’s power to change the employee’s position, duties, and responsibilities from time to time can provide additional protection to the start-up.[4]

Compensation:
The employment agreement should set out monthly or annual salary and should reference any stock option grants if they exist. It is important that any mention of additional compensation, such as a bonus, should be clearly stated to lie in the dole discretion of the board of directors – bonus’s may be earned but there may not be enough money to reliably pay it.[5]

Termination:
Unfortunately, not all employees will work out and the employment relationship will have to be terminated.  Employers have an implied contractual obligation to give employees proper notice of termination of the employment relationship unless there is “just cause” for immediate dismissal.[6] Since “just cause” presents a very high legal bar to pass, it is advised that the employment agreement prepare for a “without cause” situation.[7]

There are two legal regimes for determining proper notice – the relevant provincial Employment Standards Act and the common law. The relevant provincial Employment Standards Act will provide notice minimums that must be adhered to and cannot be contracted out of, whereas the common law provides for what is known as “reasonable notice”. Reasonable notice will typically exceed the minimum prescribed by statute and are determined by factors such as the character and length of service, and the employees age and prospects for future employment.[8] If the employer and employee have previously agreed on the length of notice to be given, i.e. a written employment agreement with express notice terms, then those terms will generally govern provided they comply with statutory minimum notice requirements.

Generally, an employer can elect whether to provide “working notice” or whether to end the working relationship immediately by providing the employee with a lump sum equivalent to the notice period that is, a payment "in lieu" of notice.[9]
In light of the above, a termination clause in an employment agreement should:[10]

1. Make it clear that the employee may be terminated at the sole discretion of the company.
2. Set out the amount of notice or quantum of severance that an employee is entitled to receive if they are terminated without cause.
3. Be very careful not to violate the notice provisions of the relevant provincial Employment Standards Act, otherwise the termination clause will be unenforceable, and the employer may be exposed to a greater notice or severance requirement at common law-reasonable notice.
4. Impact of termination on any bonuses or commission payments should be expressed explicitly.

Restrictive Covenants:
Non-Competition Provisions:
A non-compete clause is a clause under which an employee agrees not to enter into or start a similar profession or trade in competition against the employer. These clauses are notoriously hard to enforce due to courts often viewing them as an unreasonable restraint of trade.[11]
Practically, you may have an easier time enforcing these clauses if:[12]

1. The geographic and temporal scope of the covenant are kept specific and narrow.
2. Used very sparingly – only include in the employment agreements of the most vital employees.
3. Ensure that the employees have ample scope to find alternative employment in their specialization without offending the covenant.

Non-Solicitation Provisions
This kind of provisions bar the ex-employee from contacting the stat-up’s current employees, investors, customers, business partners or suppliers in connection with a rival business. These are more reliable than non-compete provisions but can still be struck down if too broad.
Practical solutions include:[13]

1. Draft the provision to prevent the employee from soliciting only the individuals with whom they personally worked and developed a relationship within the course of employment.
2. The restriction should last no longer than one-year.  
3. Clearly differentiate the provision from the non-compete provision – courts have refused to sever an invalid non-compete from a larger non-solicitation provision, resulting in both being struck.

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[1] Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practices, 3rd ed (Canada: LexisNexis Canada Inc, 2018) at 127 [Tingle].
[2] See Holland v. Hostopia.com Inc 2015 ONCA 762.
[3] See Ferdinandusz v. Global Driver Services Inc, [1998] O.J. No. 4225.
[4] Tingle, supra note 1.
[5] Ibid at 142.
[6] Peter M Neumann and Jeffrey Sack, eText on Wrongful Dismissal and Employment Law (2020), Lancaster House, 2012 CanLIIDocs 1 [Neumann].
[7] Tingle, supra note 1 at 128.
[8] Neumann, supra note 6.
[9] Ibid.
[10] Tingle, supra note 1 at 129-30.
[11] See Elsley Estate v JG Collins Insurance Agencies Ltd., [1978] S.C.J. No. 47.
[12] Tingle, supra note 1 at 131-34.
[13] Ibid at 135-36.