A “Creative” Employment Contract is not always a good employment contract.
Recently a client of mine showed me a “creative” contract that his corporate lawyer (ie. not an employment lawyer) provided him. This other lawyer suggested that my client use this contract when hiring a new senior employee.
This client – the Founder and CEO of his company – explained to me that he has been engaged in negotiations to hire a new employee who will be pivotal to the operation of his business. This other lawyer recommended he call this new employee a contractor. This way he could avoid paying ei and cpp remittances, and “save some money”.
Here are some of the reasons why after we reviewed this together he decided not to “save money” with this “creative” idea:
Firstly, the “creative contract” allowed this employee to provide his services to other companies. This was done in an effort to ensure the individual was characterized as a contractor . When I asked my client about this, he explained that he expects his new employee would be required to work not just full-time hours, but plenty of over-time, and that his availability after-hours and on short-notice is absolutely vital. He required a relatively high level of control over the hours of this employee. So, right off the bat I could see that this contract did not suit the needs of the business.
Secondly, given the competitive nature of the industry in which my client operates, he was not comfortable with his client providing services to other companies for which his talents are suited. He greatly preferred that this employee work exclusively for his company.
Finally, having already substantially negotiated the terms of this new hire’s employment, it was agreed that this new hire would receive a salary and would have minimal variation in compensation based on success of any given project (ie. minimal chance of profit and zero risk of loss).
This contract fails on two grounds: (1) Business Objectives, and (2) Legal.
(1) Business Objectives
Many lawyers forget to consider first and foremost, our job is to provide our clients with guidance in order to achieve their objectives. We are trying to help our clients meet their goals, not to demonstrate how clever or creative we can be as lawyers.
The “creative contract” drafted by the other lawyer allowed the employee to work for other companies, did not guarantee the hours my client felt were required. I also pointed out that the expected cost savings amounted to significantly less than 1% of the salary provided to this employee. This employee would be heavily involved in billion dollar projects and would be vital to the company’s performance. To lose a high degree of control (and exclusivity) over this employee would pose significant risk the company’s performance, and would prove far costlier than simply remitting payroll appropriately. This is the epitome of “penny wise and pound foolish”.
(2) Legal Considerations
I explained to my client that if this contract were challenged in court, it would almost certainly fail and that an Ontario court would determine this individual to be an employee and not a contractor (regardless of what term is used within the contract to refer to this employee). This would result in significant exposure to liability for the company, including damages for unpaid wages, payroll taxes and remittances, as well as interest and penalties.
This contract also failed to take into account what would happen should a court determine that this individual were an employee or a dependent contractor (distinct from an independent) contractor. In the event that his employment were terminated, given the significant salary being paid to this individual, this exposed the company to a claim for as much as two years’ pay (nearly a million dollars) rather than limiting this exposure to (in this case) a maximum of 34 weeks’ pay with the appropriate contractual protections.
A lesson to lawyers and clients alike: the first step one should take before drafting a new employment contract or securing legal advice is to determine the business objectives and proceed from there. Working backwards can often result in poor performance from both a business and legal perspective.
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