Quick Hits

• Carefully drafted contracts are important for employers expanding operations into Canada to mitigate liability and maintain flexibility, since Canadian employment law operates differently from other jurisdictions.
• Key clauses in Canadian employment agreements, such as those addressing termination, variable compensation, vacation, and temporary layoffs, are essential to prevent unexpected liabilities and ensure compliance with provincial employment standards and common law.
• Employers may want to regularly review and update Canadian employment contracts to align with international operations, manage risks, and avoid costly litigation, as the legal landscape for employment agreements is continually evolving.

For example, in the United States, the doctrine of employment at will and the prevalence of offer letters create a relatively light contractual framework. In Canada, however, employment relationships are governed by a complex blend of provincial employment standards, legislation, and judge-made common law.

A carefully drafted contract is the single most effective tool for reducing liability and preserving operational flexibility.

Below are five clauses that every Canadian employer may want to include, in enforceable form, in each Canadian offer of employment.

Termination of Employment Clause

A robust termination clause is indispensable. Absent an enforceable contractual provision, Canadian common law implies a right to “reasonable notice” of termination of employment—often calculated in months per year of service and capped only by judicial discretion. Consequently, an employer that neglects to limit notice or severance can face liability far in excess of statutory minimums, especially for long-service or senior employees. A well-crafted clause that complies with the minimum requirements of the applicable provincial employment standards act but expressly displaces the common-law presumption can reduce termination costs to a predictable, fixed amount.

Variable Compensation and Fringe Benefits at Termination

Employers may wish to consider addressing bonus plans, incentive compensation, stock options, car allowances, and other fringe benefits in their employment agreements, clarifying whether these benefits will continue as part of termination packages (subject to specific minimum requirements under applicable employment standards legislation).

Canadian courts often interpret silence as consent; if the contract does not specify that such benefits cease on the date of notice or payment in lieu, judges may award the cash equivalent for each element throughout the common-law notice period. By clarifying in the agreement that participation in these programs ends on the later of the working notice period or statutory notice, and by ensuring the termination clause addresses “all forms of compensation,” employers can help avoid unexpected payouts.

Vacation

Well-drafted employment agreements typically address vacation pay and scheduling with precision. Employers are often surprised to find themselves facing employees with exorbitant vacation accruals or significant vacation pay owed at the time of termination. Employers are also often caught off guard with respect to the way vacation pay is presumed to be calculated. Without a clear vacation policy and contractual language, employers may be exposed to unexpected liabilities, as courts may presume employees are entitled to the greater of statutory or contractual entitlements. A well-drafted vacation clause and policy can help prevent these surprises by clarifying accrual limits, payout obligations, and the employer’s right to schedule vacation, ensuring that vacation pay obligations are predictable to both parties.

Temporary Layoff (Furlough)

Employers are often surprised to learn that a temporary layoff—or furlough—does not exist at common law in Canada. Without contractual consent, a unilateral suspension or reduction of work, even for a short period, can be deemed a constructive dismissal that triggers the very termination liabilities the employer hoped to avoid. The solution is to reserve a contractual right to impose a temporary layoff in accordance with the time limits and notice provisions prescribed by the applicable employment standards legislation. Including this clause in the employment agreement gives the organization flexibility to respond to economic downturns, supply-chain disruptions, and seasonal lulls without terminating employment outright.

Other Employer Protections

Finally, an employment agreement is not simply a shield; it is an opportunity to align international and Canadian operations under a consistent compliance program. Properly implemented, the contract can incorporate restrictive covenants tailored to Canadian enforceability standards, articulate intellectual-property ownership, confirm the employer’s right to set and revise policies, and reinforce workplace culture across borders.

From a risk-management perspective, the drafting exercise itself encourages the organization to audit its practices, reducing surprises as employment relationships mature.

In short, foregoing written employment agreements in Canada invites unnecessary litigation and budgetary shock. Employers may want to review all existing Canadian contracts and update template agreements before the next hire. Proactively drafting agreements invariably costs much less than what employers face in settlements and judgments in favor of employees.