Employment Law Considerations for Startups (Part 2)

The following blog post is the second installment in a two-part series on Employment Law. The first blog post can be found here.

Choosing whether to hire employees or independent contractors is an important decision for start-up companies. Going with the former optioncomes with a number of employment law considerations, such as employment contracts, termination of workers, obligations and rights of employers, and stock-options. It is strongly recommended to consult legal experts to ensure that your business is compliant with the applicable laws – the violation of which can be very costly, especially in the early stages of your business.

What is an Employment Contract?

The Civil Code of Quebec (CCQ) defines employment contracts as “contracts by which a person (the employee), undertakes, for a limited time and for remuneration, to work under the direction or control of another person, the employer”. Such an agreement can be for a pre-determined fixed-term, or it can be for an indeterminate term.

Most contracts are of an indeterminateterm, which means that the employee has a clear start date, but no pre-determined end date – this is also referred to as permanent employment. Fixed-term contracts, on the other hand, stipulate a clear start date and end date. Internships are a common example of fixed-term contracts.

Employment contracts can also containnon-compete clauses. These clauses prevent an employee from entering into competition with the employer or from participating in an enterprise that is in competition with the former employer, during and for a specified period of time after employment. Such a clause must be provided for in express terms in the employment agreement. Non-compete clauses are limited to the legitimate interests of the employer that necessitate this protection, and its application is limited in time. It is important to note that the enforcement of non-compete clauses varies between jurisdictions. It is recommended that you consult legal experts when drafting non-compete clauses to ensure they will be enforceable.

Employers must also keep in mind that employmentcontracts are automatically renewed for an indeterminate period if – after the final date of the agreed-upon term – the employee continues working for at least five days without objection from the employer.

Employers must be cautious when drafting employment contracts by using templates found on online sources. Rules governing employment contracts vary between jurisdictions and using a template that does not originate from your jurisdiction can result in the inapplicability of certain clauses. Consult a legal professional to assist you in the drafting and revision of your company’s template employment contracts.

Termination of Employment

When there is an indeterminateterm contract, a party seeking to terminate the contract (whether it is the employee or the employer) must give notice of termination to the other party. That notice of termination does not have to bewritten, however, it must be given in reasonable time “taking into account, in particular, the nature of the employment, the specific circumstances in which it is carried on and the duration of the period of work”.

The employment contract willalso be terminated upon the death of the employee, or less commonly and depending on the circumstances, the death of the employer. Lastly, in cases where a serious reason is demonstrated, one of the parties may terminate the contract without giving prior notice. Some examples of what the court has deemed to be a serious reason include the employee's incompetence, inability or incapacity to perform their duties properly, dishonesty, alcoholism, insubordination or disobedience.

Mutual Obligations

Quebec law imposes onemployers certain obligations towards their employees. Those obligations include, but are not limited to: allowing employees to perform their work in an environment that respects their health, safety and dignity. Naturally, the employer must also remunerate the employees in accordance with the agreed-upon wage.

Employees also haveobligations towards their employer. Mainly, that consists of performing the tasks associated with the job with prudence, honesty and diligence. The employee is also bound by confidentiality regarding information obtained through the course of employment. These obligations continue for a reasonable time after the contract has been terminated, and permanently where the information relates to the reputation and privacy of third parties.

Additionally, the ActRespecting Labour Standards (ARLS) provides further protection toemployees and additional obligations for employers. Employers must ensure that their employment relationship is compliant with the Act. The Act governs, among other things, workplace conditions, wages, sick days, youth employees, termination, and vacations. These are important considerations for up-and-coming businesses and constitute the minimum standard of compliance.

Finally, otherrelevant legislation include the Pay Equity Act, the Quebec Charter of Human Rights and Freedoms, and the Charter of the French language.

Employee Stock Options (ESO)

It is possible for employersto compensate their employees’ work by granting them derivative options of company stock. They are commonly used by start-ups to compensate and incentivise their new employees, given the often insufficient starting salaries.

This gives the employee theright to purchase stocks of the company at a specific price – and for a determined period of time. If the parties agree on this, the terms of the ESO will be expressed in an ESO agreement.

Employees can usually only exercisetheir options when their company is acquired or at the initial public offering. Indeed, at the time where the stock’s price surpasses the purchase price, employees may exercise their stock option and sell the stock.

The individuals who carry outthe work needed to conduct business are at the heart of any start-up company, no matter the industry. It is essential that start-ups understand and comply with the body of laws and regulations that govern the relationship between employers and workers. Answers to specific questions should be determined with the advice and assistance of a lawyer.

Sources and Helpful Links