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July 4, 2012

Five best practices when letting an employee go

by Celia C. S. Fergusson and David A. Simpson

It is never an easy decision to let someone go, but there are measures you can take to ensure the process goes as smoothly as possible. As employment lawyers, we receive hundreds of inquiries from employers who are about to terminate or have just terminated an employee. In some cases, a more proactive approach when hiring would have saved the employer time and money. We have brought together some best practices to help you avoid some of the common legal pitfalls when letting an employee go.

1. Be proactive and execute a thorough employment contract at hiring.

The best way for any employer to protect themselves from the expenses associated with termination is to be pro-active. Set out the obligations at the very beginning of the relationship, before the employee starts working. An employment contract, which is clear in its terms and in compliance with the law, can set out the rights of the employee and employer on matters such as notice periods upon termination, post-termination obligations (restrictive covenants) and entitlement to overtime. In dealing with any termination, the first thing your counsel will ask is whether there is an employment agreement. If the answer is yes, it saves time and more importantly, money.

Although it is best to enter into an employment contract at the beginning of the employment, the contract can be implemented after the commencement of employment provided that the proper process is followed.

If implementing an employment contract after the employee is already working, we recommend contacting legal counsel to set up these types of employment contracts in accordance with the principles outlined in the Ontario Court of Appeal decision of Wronko v. Western Inventory Services Ltd.

2. Understand the distinction between minimum notice in the Employment Standards Code and the Common Law.

In Manitoba, The Employment Standards Code sets out the minimum notice that must be paid to an employee on termination without cause. The most common misconception of employers is that this is the only amount that must be paid to a terminated employee. The amounts set forth in the Code are the minimum protections and will not limit an employee from claiming entitlement to greater notice according to common law principles, in a lawsuit.

Determining the reasonable notice period in accordance with the common law is often considered to be an art rather than a science; thus, it cannot be calculated with exact precision. The determination of the courts is based on an analysis which includes an examination of the following factors:

• Age of Employee
• Length of Service
• Character of Employment
• Availability of Similar Employment
• Bad Faith Discharge
• Inducement

Be sure to contact legal counsel to determine the appropriate amount of reasonable notice where the employment contract does not limit the notice period, before terminating an employee. The potential exposure is often greater than employers expect, especially for long term employees.

3. Protect the employer’s intellectual property.

During the course of their employment, many employees work on projects that would be considered intellectual property. From software development to restaurant recipes to manufacturing equipment or machinery, intellectual property is present in a wide variety of workplaces and businesses.

Intellectual property is the property of the employer and NOT the employee. Anything created or conceived by the employee, derived from their work for the employer, whether done during or outside regular business hours, will be the property of the employer. Employees are well advised to seek intellectual property advice for any ideas conceived or realized, prior to commencing employment and to document the origin of any ideas conceived or created after termination.

4. Understand what happens to the employee’s benefit upon termination.

Unlike dental or health benefits, group long-term disability benefits are not usually extended to terminated employees during his/her period of notice period because the wording of the policies does not allow for it. It is important for employers to understand the specific provisions of the group policy and timeframes within which group benefits can be extended for terminated employees. Group benefits usually terminate once the employee ceases to be “actively at work”. Employers are often required by the policy provision to provide the group insurer notice of the termination in order to extend benefits, however, this is rarely done in practice. The employer should also set out steps in the termination letter for converting the group policy to an individual policy for the employee to continue coverage within the policy time period; otherwise the employee may be disentitled to coverage, forcing the employer to step into the shoes of disability insurer and be responsible for the long term disability benefit payments for the duration of the employee’s disability.

5. Know what a former employee can do with respect to customers and contacts.

The question often arises as to what employees can do after they are terminated, in terms of competing or soliciting clients of their former employers. All employees owe their employers a general duty of good faith and fidelity. This is an implied term in every employment contract.

A regular employee (i.e. not a fiduciary) after leaving the employment of the employer is entitled to compete against the employer and even solicit customers provided the employee does not do so "unfairly". This has been held to mean that the employee cannot use the former employer's trade secrets or confidential information, including contacts lists, to solicit clients.

There are different rules, however, for a terminated director/officer/key management employee or fiduciary. Although these terminated employees are allowed to accept business from former clients, they may not directly solicit business from former clients or risk facing lawsuits, damage payments and possible injunctive sanctions.

Celia C. S. Fergusson and David A. Simpson practice employment and labour law at Fillmore Riley LLP. If you have any questions, please contact them at cfergusson@FillmoreRiley.com or davidsimpson@FillmoreRiley.com.

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