Why Startups Need Employment Contracts
Canadian startups should have an employment contract for all new hires. An employment contract helps both parties understand the employment relationship, protects the startup in the event of the termination of employees, and it can also serve as a valuable mechanism to attract good employees.
A solid startup employment contract should contain all the usual, common-sense elements in an employment offer: term of employment (i.e. indefinite or some fixed term), salary, recall rights, vacation, benefits, start date, the startup’s right to amend the terms with notice, etc. However, an excellent employment contract, especially for startups, should contain the following:
- a termination clause;
- a probationary clause;
- a series of restrictive covenants; and
- an incentive clause;
Importantly, an employment contract should have an enforceable termination clause which delineates the employee's right to notice / severance upon termination. At least in Ontario, Canada, without a termination clause, the common law of notice/severance automatically applies, which can be expensive and unpredictable for startups.
- Notice/severance comes in two formulas: statutory notice and common law “reasonable notice”. Statutory notice is the minimum amount of notice that an employer must provide an employee according to government law (i.e. the Employment Standards Act). On the other hand, reasonable notice is the amount of notice an employer must provide an employee according to judge-made “precedents”.
- Reasonable notice is much more beneficial to employees than statutory notice at the expense of employers. While the Ontario Employment Standards Act’s minimum statutory notice provisions provide only one week of notice per year of service, up to a maximum of 8 weeks, reasonable notice can provide up to a few months of notice per single year of service, up to a maximum of about 26 months.
The termination clause in the employment contract could be drafted to limit the employee to minimum notice/severance under the Employment Standards Act to just one week of notice/severance for every year of service. Or, the termination clause in the employment contract could be made to delineate some formula which is more favourable to the employee (i.e. two weeks per year of service), which is relatively attractive to some candidates but still serves to somewhat protect the startup from potentially expensive common law reasonable notice.
In addition, there should be a clause under the “termination” heading stipulating what is “cause” to terminate the employee without notice/severance (i.e. willful misconduct).
Finally, a clause should inform the employee of their obligation to provide reasonable notice of resignation. A small startup could be ruined if its employees were to leave suddenly without warning.
An employment contract for a startup should contain an enforceable probation clause. If someone doesn’t work out immediately, the startup can terminate that person without giving any notice/severance, saving monies.
An employment contract for a startup should contain enforceable restrictive covenants. Restrictive covenants are clauses in employment contracts that prohibit an employee from doing certain things during and after employment. A good example of a restrictive covenant is an "exclusivity clause", which makes it a breach of contract if the employee takes another full time job on the side.
Startups must be especially cautious of employees competing against them, stealing their clients/employees, claiming inventions as their own or using the startup’s trade secrets to advance their projects. Thus, these critical restrictive covenants should be included in startup employment contracts:
- A non-solicitation clause prohibits employees from soliciting or dealing with employer customers. Non-solicitation usually also prohibits the employee from soliciting other employees to leave the employer;
- An IP clause, which outs the common law presumption that an invention made while employed belongs to the employee, not the employer; and
- A confidentiality clause prohibits employees from disclosing confidential information or trade secrets acquired during their employment, which is especially important for startups in the tech sphere.
An employment contract for a startup should contain language whereby the new hire agrees that they are under no restrictive covenants from past employers preventing them from working for the startup.
Innovative startups pay their employees a bonus for hitting specific targets. This is because most other startups, especially in the tech industry, have incentive plans and therefore, startups with a good bonus plan will be more attractive to the best candidates.
goHeather automates employment contracts. Our Canadian startup can build your startup an employment contract in five minutes for a fraction of the price of the lawyer. All our employment contracts templates are custom-made for each province by an employment lawyer.