EMPLOYMENT ISSUES

At some point in the growth of the business, entrepreneurs will have to hire and terminate employees. Employment in Canada is heavily regulated and governed by either federal or provincial legislation. Most employers are covered by provincial legislation. Federal employment laws apply only to industries within the Federal government's jurisdiction. Those include banks, shipping, railways, airlines, inter-provincial or international trucking, broadcasting, and telecommunications. The employment relationship is subject to a number of Federal and provincial employment laws that provide minimum standards with respect to such issues as minimum wage, maximum hours of work, overtime pay, maternity leave, holidays, and severance pay. Employers are prohibited from contracting out of those minimum standards. Technology startups need to comply with these regulations and balance the company's needs with the rights of employees.

GOVERNMENT SPONSORED PLANS

Health Insurance

All provinces provide comprehensive schemes for health insurance. The plans provide for necessary medical treatment, including doctors' bills and hospital stays. They don't replace private disability or life insurance coverage. The provincial health insurance plans vary in how their revenues are collected. In some provinces, employers must pay premiums, while in others, individuals pay premiums. In some provinces, the entire cost of health insurance is paid for from general tax revenues.

Employment Insurance

Employees and employers both must contribute to the Federal Employment Insurance Plan. It provides benefits to insured employees who lose their jobs. It also provides income replacement benefits when employees take a maternity or parental leave.

Canada Pension Plan

This Federal plan provides pensions for employees as well as survivors' benefits for dependent children and spouses of deceased employees. All employees and employers, except in the province of Quebec, must contribute to the plan. The province of Quebec has a similar pension plan that also requires joint contributions.

Anti-Discrimination Laws

Technology startup companies should proceed cautiously during the hiring and screening process. Canada has pro-active employment and pay equity laws aimed at effectively redressing the substantial inequalities facing women, racial minorities, persons with disabilities, and aboriginal peoples. The federal government and each province have passed statutes that restrict employers' ability to discriminate among employees based upon race, sex, religion, national origin, age, or physical disabilities. The main thrust of Canada's proactive equity laws has been to require employers and trade unions to jointly take pro-active steps to identify and redress systemic discrimination in recruitment, treatment, compensation, promotion, and retention of employees who have been historically disadvantaged in the workplace.

The Federal government also requires that individuals receive equal pay for equal work regardless of their sex. In determining the meaning of "equal pay" and "equal work," courts consider such factors as seniority, merit, and quality or quantity of work as legitimate factors in compensating people of different sexes differently. Canada's pay equity laws all apply to the public sector and almost all also apply to the broader public sector and crown corporations. Legislation in Ontario, Quebec and in the federal jurisdiction applies to much of the private sector as well. Most require comparisons between male- and female-dominated occupations defined as those in which one sex holds either sixty or seventy percent of the jobs. All define value in terms of skill, effort, responsibility, and working conditions. In several jurisdictions, the method of comparison is not prescribed, although the call for job comparisons that are free of gender bias is found in several jurisdictions.

Canadian pay equity legislation is based on the assumption that the labour force is segregated in ways that once served to systematically undervalue women's work, and that neither the market nor employers would correct this inequity. It was designed to alter the value attached to such work by forcing employers, working with unions when they were present, to examine their pay practices and "to ensure the comparison system remedies the historical under-valuation of women's work." It is not intended to change what men and women do in the labour force, but rather to recognize and pay for the value of the work that was being done by women. While it addressed the systemic discrimination expressed in the wage rates women shared, it did nothing about the discrimination individual women faced in seeking other, usually more highly paid work. Employment equity, that is Canadian legislation requiring positive measures to ensure equality, is intended to do just that.

The Supreme Court of Canada, in interpreting human rights legislation, made a number of rulings that had a significant impact on the future of pay equity legislation. The first major ruling was that discrimination is primarily systemic and unintentional and includes employment policies and practices which may appear neutral, but which disproportionately impact on disadvantaged groups such as women. The Court also decided that human rights laws are special laws which are next in importance to the constitution and must be practically enforceable so that discrimination can be identified and eliminated. The Supreme Court also found that special measures or an employment equity plan, which included hiring goals, are reasonable and necessary positive measures to remedy systemic discrimination.

Termination of Employment Relationship

The courts have expanded contract law in employment cases. They have consistently held that every contract of employment, whether in writing or not, includes an implied term to the effect that no employee will be dismissed without reasonable notice or compensation unless the employer can establish justifiable cause for termination. In the event of such dismissal without cause, the employer will be held liable for the inevitable economic consequences suffered by the employee over a reasonable period of notice. On the basis of certain established criteria, the court decides what period of notice is reasonable or the amount of compensation to be provided the employee in lieu of notice. The award will be reduced by any employment income the terminated employee may have earned during the period of reasonable notice. In the event of such dismissal without cause, the employer will be held liable for the inevitable economic consequences suffered by the employee over a reasonable period of notice. On the basis of certain established criteria, the court decides what period of notice is reasonable or the amount of compensation to be provided the employee in lieu of notice. The award will be reduced by any employment income the terminated employee may have earned during the period of reasonable notice.

Reasonable Notice

Mr. Justice McRuer, set out in Bardal v. Globe & Mail Ltd. certain criteria that he believed ought to determine reasonable notice in cases of wrongful dismissal – “There can be no catalogue laid down as to what is reasonable notice in particular classes of cases. The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant, and the availability of similar employment, having regard to the experience, training, and qualifications of the servant.” This test leaves wide discretion with the individual judge, who may use these guidelines in a creative way, depending on his own impressions of the equities involved in the case.

Availability of Similar Employment

It is the last part of the criteria laid down by Mr. Justice McRuer - the "availability of similar employment" - that has caused certain problems. The courts have taken into account the narrow expertise of the terminated employee, the difficulty of finding similar or equivalent employment, and the limited economic circumstances into which the employee has been placed by the termination of employment. As one judge put it in Isaacs v. M. H. G., - “the fact that the defendant well knew that in discharging the plaintiff it was putting him into a depressed job market dictates a period of reasonable notice that must take into consideration the difficulty that the plaintiff would have in relocating.”

Economic Considerations

During periods of economic recession, the courts tend to be sympathetic to the employee and would not take into account the economic circumstances faced by the employer when assessing damages for wrongful dismissal. The case of Bohemier v. Storwal International Inc. in the Supreme Court of Ontario acknowledged that the employer might be "downsizing" because of its own economic difficulties and that to add to those difficulties by assessing large damage awards for wrongful dismissal might very well push the defendant corporation into bankruptcy. Mr. Justice Saunders said – “as this is a contract matter, the notice period must also be reasonable for the employer. What may be a reasonable period to allow a discharged employee to find new employment may be more than an employer should be asked to pay.... If the period of notice is extended too far, the ability to dismiss employees for economic or other reasons may be seriously impaired or rendered illusory.”

Courts are prepared, for the most part, to take into account market conditions as they affect the employee's ability to find reemployment for the purpose of lengthening the notice period. But they are not likely to keep in mind that a notice period must be reasonable from the employer's point of view and not place the business in jeopardy or make the cost prohibitive for an employer to terminate employees during an economic downturn. Courts were particularly sympathetic to older terminated employees who had provided long service, and the awards exemplified that concern. There was an assumption that the older the employee, the longer the service, and the higher the level of responsibility, the more difficulty the employee would experience in finding equivalent employment. Younger, lower-level employees without lengthy service were often disappointed in the courtroom because their expectations, fueled by the media, were seldom justified. Once economic conditions improved, as they certainly have in southern Ontario, it might be expected that all awards would be reduced because it takes less time for terminated employees to find new jobs during good times than during bad times.

Employee Protection

Both the federal government and the provinces have enacted laws that protect employees' health and safety. In 1965, the federal government enacted Canada Labour Code. The Code establishes authority to set a minimum wage and requires payment of "time and a half" or 150 percent of the normal wage rate for overtime work, defined as hours worked over the standard forty-hour workweek. However, the Code provides exceptions to the minimum wage and maximum hour requirements for "bona fide" executives, administrators, or other professionals.

To protect employees' safety, the government of Ontario passed the Occupational Health and Safety Act in 1990. The act requires workplaces to be "free from recognized hazards" that could cause serious injury or death. The act also created the Occupational Safety and Health Administration (OSHA) to oversee and evaluate compliance with health and safety standards. OSHA promulgates health and safety rules, investigates employer health and safety compliance, requires detailed records of health and safety incidents, and can bring administrative enforcement actions against employers who fail to comply with its rules and regulations. Technology startups must be aware and follow these health and safety standards.

Employers must also be cognizant of employees' rights to unpaid leave for illness to themselves, a child, or parent as well as for the birth of a child or the adoption of a child. This benefit applies generally to companies with fifty or more employees, but it should be considered by all growing startups.

PROTECTION FOR TECHNOLOGY STARTUP

Non-Compete Agreements

A non-competition agreement can be thought of as an employment prenuptial. As one commentator explained: "As long as the parties are happily married, no one reads the document." A non-compete agreement is designed to protect a company when a key employee, whose knowledge may be both the greatest asset and threat to the company, leaves for greener pastures. Too often, the details of the non-compete become the focus of each party's attention only when it is called into force. Non-compete agreements are usually enforceable so long as they are: (1) based upon valid consideration; (2) necessary to protect the company's interests; and (3) reasonable in geographic scope and duration.

Defense is the best offense in the non-compete arena, and litigation is usually a last resort. Litigation diverts management's attention, and it is almost always expensive. A well-crafted non-compete agreement may discourage employees from violating the agreement without the need for a court battle. As a supplement to a company's non-compete, a company may defer compensation (e.g., stock payments or salary) to encourage the employee to remain with the company until the salary accrues or the stock vests. Moreover, such agreements can include forfeiture clauses where employees lose compensation if they leave to work for a competitor.

Appropriately styling a non-compete clause is the first step toward assuring judicial enforcement. Judges are more likely to view an employer's non-compete language in a positive light if the actual proscribed activity is defined with precision, such as "Covenant not to Misappropriate Proprietary Information." Drafting with precision normally demonstrates to a judge that the employer's goal is to protect its property interests rather than to punish an employee who decides to leave.

Work for Hire and Assignment of Rights Agreements

Because intellectual property is usually central to an entrepreneur's business plan, it must be protected prudently. Pre-employment work for hire and assignment of rights agreements do that by ensuring any copyrightable or patentable work product produced during the course of employment is, and remains, the employer's property. Failure to protect the company's intellectual property could result in losing it entirely or having to purchase a license from the employee owner. In both situations, the financial future of the company may be severely compromised. Copyright law provides statutory protection for employers and businesses that specifically hire a contractor to develop a work. For startups, because software is copyrightable, a business must eliminate any ambiguities by having a contract provision assigning any copyrights to the employer before the employee or contractor begins services. Otherwise, the contractor or consultant has a claim to the work performed.