Introduction to Canadian Employment Contracts for US Employers

Introduction to Canadian Employment Contracts for US Employers 

Do I Need an Employment Contract When Hiring in Canada? 

Just like many countries, Canadian recognizes offer letters, verbal offers, and fully drafted and vetted contracts as binding employment contracts. However, while employment contracts are not mandatory in Canada, they are an extremely useful tool for employers. Employment contracts remove ambiguity and set clear job expectations for managers and employees alike. They establish a clear written agreement about what the job entails and what benefits the employee is entitled to.  

Without a vetted contract in place, disputes default to common and civil law. Canadian courts are employee-friendly and have been known to award settlements beyond the minimums established in provincial employment standards. In this blog we will explore the value of properly drafted employment contracts and what you need to include in them! 

Why You Need an Employment Contract  

Employment contracts are an important element of risk management. They establish a clear description of the job, the respective responsibilities of the employer and employee, and a definitive and thorough governing document. In the absence of a clear contract, courts can look at multiple documents (including email and verbal communications) as being contractual in nature. Similarly, in the absence of clear documentation about what the job entails, it can be difficult to prove that your employee isn’t doing it.  

In addition to clarity, employment contracts lay out termination and post-employment conditions designed to keep companies out of court, or to set themselves up for the best position possible if a dispute escalates to that point. Unlike the United States, there is no employment at will in Canada. Instead, terminations are handled based on the concepts of notice and cause.  

  • Notice: In general, when you are terminating an employee in Canada, you must give notice (1-8 weeks depending on province and tenure) of termination or pay equal to the notice period in lieu. Failure to give or pay notice could result in a termination dispute going to court. In Ontario, employees are entitled to severance pay after 5 years of continuous service.  
  • Cause: When an employee has committed misconduct or violated their contract, employers have “cause” to terminate without notice. If you are terminating with cause, you must ensure you have a solid case for that cause. When disputes go to court, your employment contract will mitigate some of your risk, but common law is the most important factor in determining if there was cause.  

When a termination dispute goes to court, employees can be awarded termination pay beyond the statutory minimum and considering their seniority, their salary and benefits, how long it will take them to find a new job, and their age. Employees with niche skills, long tenure, senior leadership, or nearing retirement present elevated risks. Good employment contracts don’t solve every problem but they do reduce your risk of protracted lawsuits and of even going to court in the first place.  

10 Things You Need to Include in Your Employment Contract

Good employment contracts can be the difference between years of lawsuits and smooth terminations. So, what makes a good employment contract? Your employment contracts should clearly define:  

  • Job description 
  • Compensation including details of bonus or stock option packages  
  • Vacation, sick days, personal days and potentially how they accrue  
  • The value, terms and start date of employee benefits including health insurance, RRSP retirement match, spending accounts, allowances 
  • If there is previous tenure (for example through an affiliate or subsidiary), what their entitlements are  
  • If there is a severance package, in what circumstances it applies, in what circumstances it is forfeit, and the schedule for payment  
  • If the role is overtime eligible or exempt and how overtime is to be handled  
  • If they are remote, what their province of employment will be  
  • How long the probation period will be  

6 Things to Know About Canadian Employment Law  

Canada has a federal system in which power is shared by the federal government and the provinces and territories. When it comes to employment laws, these are established by the federal government and provinces in their Employment Standards Acts, the Labour Code in Quebec, and Human Rights Codes. The laws in each province and territory have subtle differences that can be difficult for non-experts to stay on top of. 

Here are six key facts to keep in mind about Canadian employment law:  

  1. While both the federal and provincial governments have jurisdiction over employment law, only a fraction of Canadians are under federal jurisdiction. The federal government oversees employment law for its own employees and for those in federally regulated industries, such as telecommunications, banking, and ports.  
  2. A contract from one province cannot be used in another without a legal review. While the basic principles of Canadian employment law are the same from one province to another, the devil is in the details. By the same token, foreign contracts should not be used in Canada at all.  
  3. There is no employment at will in any Canadian province or territory. Instead, employees can be terminated with or without cause, but must be given notice or pay in lieu of notice. The amount of notice and pay varies by province.   
  4. Quebec is the only Canadian province that is governed by civil law, not common. The province also has strict language use requirements. In Quebec, new hires should be offered contracts and onboarding documents in French, with English as an option. 
  5. Non-competes and non-solicits should be thoroughly reviewed before you deploy them. The courts in various provinces have taken different views of their enforceability, and they are banned in certain circumstances. In Ontario non-competes and non-solicits are generally invalid.  
  6. Ontario is often described as having the most “mature” employment law, with many rules that smaller provinces have yet to consider. For one, employees in the province are eligible for severance pay after five years. While there is a statutory minimum amount for severance pay, in practice, severance calculations are complicated and should consider seniority, worker age, role, availability of similar types of jobs and more, not just tenure. 

As you can see, employment contracts can get complex, especially if you don’t have experience in the Canadian market. That’s why so many US and international companies rely on an Employer of Record to handle compliance when they hire in Canada.  

How an Employer of Record (EOR) Can Help

Employers of Record (EORs) like Canadian Payroll Services hire people on behalf of companies that don’t have a legal entity in Canada. By hiring employees for you, we empower you to hire outside of your home country and take on the payroll and compliance responsibilities of employment while you manage your team’s day to day. We draft and manage employment contracts that are compliant in every Canadian province and territory. After the contract is signed, we provide ongoing HR support, process payroll, and ensure that you are compliant every step of the way.  

Working with an EOR like Canadian Payroll Services is the best way to mitigate your risks when hiring outside of the US. 

Start Hiring

While employment contracts aren’t mandatory in Canada, they are a great way to mitigate risks. Canadian employment law can be complex and is always changing. Having a rock solid employment contract that is regularly reviewed by a local Canadian legal team is key element to keeping you compliant with ever-changing laws.  

Employers of Record (EORs) like Canadian Payroll Services can help you stay compliant every step of the way, from offer, to signing, and even to termination. If you would like to learn more about how Canadian Payroll Services can help you hire in Canada, get in touch!   

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