Employment Law Essentials: When an Employment Contract Will Cease to Apply

An employee’s contract with their employer can be disregarded by a court if the nature of that employee’s employment has sufficiently changed. This can have the effect of rendering void provisions in that contract governing severance, resulting in employers being liable for significantly larger payments on termination than they bargained for.

Tsai v Atlas Anchor Systems (BC) Ltd, 2016 BCPC 406 (“Tsai”), a recent decision of the British Columbia Provincial Court has shed some light on the circumstances in which a court will set aside an employment contract.

In Tsai, the claimant was hired by the defendant as an Engineer Assistant in 2008 and signed an employment contract which provided that the claimant would receive notice or severance pay only as required by applicable employment standards legislation.

As an Engineer Assistant, the claimant, among other things, went to job sites, wrote reports, performed product testing, research, and development, performed the function of a safety officer, made purchase orders, drove fork lifts and helped with warehouse inventory control.

In April 2013, the claimant received his Professional Engineer’s designation. As a result of this, his salary increased to $70,000 from $52,000, and his job duties changed. Among other things, he started going to management meetings, approved reports and drawings, and confirmed calculations. He also ceased performing many of his duties as an Engineer Assistant, including his responsibilities for health and safety, costing and inventory.

In 2015, the defendant terminated the claimant’s employment, and paid him seven weeks’ severance in lieu of notice for his termination, as calculated in accordance with the terms of the employment contract signed by the claimant in 2008. The claimant sued the defendant.

The claimant cited the case of Schmidt v AMEC Earth and Environmental Ltd, 2004 BCSC 1012 “Schmidt”, in arguing that the termination clause ought no longer to apply. Schmidt held in part that significant changes in employment can render an employment contract unenforceable by the time of termination of employment, as the “substratum” of that contract has effectively disappeared.

The court in Tsai agreed with the claimant’s argument, holding that when the claimant received his Professional Engineer’s designation there was a substantial, sudden and fundamental change in the claimant’s employment and responsibilities. In addition to the substantial change in his job duties, the court noted that he received a substantial pay increase and that it was recommended he purchase errors and omissions responsibilities.

As a result of this finding, the court held that the termination provision in the 2008 employment contract no longer applied, and that the defendant was liable to pay the claimant nine months’ pay in lieu of notice, not seven weeks. Luckily for the defendant, the claimant sued in the British Columbia Provincial Court Small Claims Division, and the award was capped at $25,000. If the claimant had sued in British Columbia Supreme Court, the defendant would have been required to pay $39,038.46.

The damage to the defendant in this case was avoidable. Had it properly drafted an employment contract which clearly anticipated the claimant’s receipt of his Professional Engineer’s designation, or provided him with a new contract when it gave him the raise, the defendant would have only been entitled to the seven weeks originally contemplated by the defendant when it hired the claimant in 2008.

The takeaway from the Tsai case is that when an employee receives a professional designation, and their duties and remuneration changes, an employer should consider whether provisions in that employee’s original contract of employment are still enforceable. In such a situation, employers are advised as a matter of best practice to have their employee sign a document confirming that the terms of their original employment contract apply. As long as there is an increase in remuneration or some other tangible benefit to the employee accompanying the signing of such a document, such a document should be enforceable.

For help drafting employment contracts, or acknowledgements of previous employment contracts, please contact the EKB employment group.