Why Employment Agreements are So Important for a Dental Practice

Why Employment Agreements are So Important for a Dental Practice

Many dentists have staff members that have been with the practice for many years. In the past, and even still now, numerous professionals prefer to avoid the legal formalities of having employees sign employment contracts. They feel that a handshake and a verbal commitment are enough. If things don’t work out, the practice will simply let the employee go. Unfortunately, as many dentists have painfully discovered, the solution is not that simple. This article will provide a general overview of the basic employment law principles in Ontario and discuss some of the pitfalls and consequences of not having proper employment agreements in place for all staff members.

The Ontario Employment Standards Act

The minimum basic terms and conditions of any employment arrangement in Ontario are set out in the Employment Standards Act (ESA). This legislation establishes such things as minimum wages, vacation entitlements, statutory holidays, lunch break requirements, overtime pay, leaves of absence and so forth.

With respect to termination, the ESA states that employees are essentially entitled to either “notice or pay in lieu of notice” of one week for every full year of service up to a maximum of eight weeks. Severance pay, which applies to employers with more than 50 employees or a payroll of greater than $2.5 million, will not be discussed in this article. It is very important to note that the ESA sets out the minimum mandatory terms. If an employment contract has any clauses which provide for less than what the employee is entitled to under the ESA, the entire agreement will likely be unenforceable.

Common Law Employment Principles

In the absence of a valid, binding employment agreement, the employment relationship is subject to common law principles. “Common law” essentially means “judge-made law”. Many employers are surprised to discover that, in the absence of an employment agreement, the termination provisions of the common law, not the ESA, applies. Under the common law, the termination entitlements of employees are significantly more generous than the ESA. Generally speaking, employees are entitled to receive “notice or pay in lieu of notice” of 2 to 4 weeks for every year of service depending on their age, position within the company, likelihood of finding alternative employment, etc.

Consider for instance, the termination of a receptionist who is 55 years old, earns $40,000 and has worked for the dental practice for twenty years. In this case, since the employee had a relatively junior position, her termination entitlement would be towards the lower end of the scale. On the other hand, her age and limited employment options, would push her towards the higher end of the scale. Under the common law, there are no hard and fast rules. Many factors are considered and the final decision can be quite subjective and at the judge’s discretion. Let’s assume the receptionist rejects the employer’s termination offer and takes the matter to court and the judge awards her 3 weeks for every year of service. Her termination pay would then be 60 weeks or $46,154 plus the employer’s share of payroll contributions (e.g. CPP and EI premiums) as well as the continuation of any group benefits plan, yearly bonuses and any other employee benefits that would have normally been received during the notice period.

The minimum basic terms and conditions of any employment arrangement in Ontario are set out in the Employment Standards Act (ESA). This legislation establishes such things as minimum wages, vacation entitlements, statutory holidays, lunch break requirements, overtime pay, leaves of absence and so forth.

With respect to termination, the ESA states that employees are essentially entitled to either “notice or pay in lieu of notice” of one week for every full year of service up to a maximum of eight weeks. Severance pay, which applies to employers with more than 50 employees or a payroll of greater than $2.5 million, will not be discussed in this article.

It is very important to note that the ESA sets out the minimum mandatory terms. If an employment contract has any clauses which provide for less than what the employee is entitled to under the ESA, the entire agreement will likely be unenforceable.

Working notice

Earlier in this article, the expression “notice or pay in lieu of notice” was used. This means that, with respect to termination pay, the employer always has the option of giving notice to the employee of termination rather than termination pay. So, in the example above, the employer, instead of paying 60 weeks of termination pay to the receptionist, could have told the receptionist that her employment will end in 60 weeks. Needless to say, working notice can be very problematic since the employee may no longer feel any obligation to the employer, may do the bare minimum amount of work, may be a negative influence on the rest of the staff and may no longer be trustworthy. In most cases, employers are advised to simply pay the termination pay and end the relationship immediately rather than have an unhappy and disgruntled employee stick around for many weeks or months.

Selling or Retiring from Your Practice

Many dentists are not aware that ongoing employee obligations are one of the greatest stumbling blocks to retiring or selling their practice. Let’s assume that a dentist has 8 staff members that have been with the practice for an average of 10 years and there are no employment agreements in place. If the dentist wishes to discontinue his or her practice and has no partners or associates to continue the practice, he or she is legally required to pay “common law” termination pay to the employees. Based on the example of the receptionist above, this amount could be as much as $300,000 to $400,000 (or possibly more) depending on the ages and particular circumstances of the employees. Further-more, the actual amount of termination pay is open to debate and discussion. Alternatively, if the dentist sells the practice, this liability is passed along to the purchaser. The purchaser may not want to hire the staff or will likely want to negotiate a significant reduction in the purchase price to take into account the fact that the purchaser is inheriting this potential liability.

Getting Existing Employees to Sign An Employment Agreement

All new employees should sign an employment agreement before they start working. The agreement may not be enforceable if the agreement is signed after the employee starts working even if it was only an hour or two after the employee had commenced work. It is recommended that prospective employees be provided with a draft copy of the employment agreement several days before they commence employment and be encouraged to carefully review the agreement and seek legal advice before signing. Otherwise, the employee many years later can take the position that the agreement is not enforceable because he or she didn’t fully understand what he or she was signing. If the court agrees, then the agreement is void and the common law would apply.

One of the trickiest situations in employment law is getting employees to sign an employment agreement after they have already been working for the practice without an agreement. At a minimum, the employer must offer some type of benefit (a pay increase, a year end bonus, etc.) in exchange for signing the agreement. As well, the employee must be given an opportunity to seek legal advice. In light of the fact that an employee will be surrendering his or her common-law entitlements (which, as outlined above, can be quite generous) in exchange for the termination provisions of the agreement, the employee, who has sought advice or has a basic understanding of employment law, may be reluctant to sign the agreement. To address this issue, employers may want to offer termination benefits that are more generous than those set out in the ESA and are closer to what is available under the common law. In this case, the primary advantage of the employment agreement is that both the employer and employee know exactly the amount of termination pay or notice required which reduces the likelihood of expensive legal disputes. Another approach that the employer can take is to insist that the employee sign the agreement in exchange for the bonus or salary increase being offered other-wise the employee will be given working notice immediately and his or her employment will be terminated at the end of the working notice period. period. Obviously, this approach is less than ideal and can lead to very hard feelings between the employer and employee.

In summary, wages are typically the largest expense of any dental practice. The absence of employment contracts can result in significant additional wage costs and legal fees. At a minimum, all new employees should be required to sign an employment agreement and careful consideration should be given to the possibility of having existing employees sign employment agreements if this can be done without causing too much disruption and employee unrest within the practice.

In our next newsletter, we will discuss some tips and suggestions on how practices can deal with disabled or difficult employees.

Disclaimer: This article is provided for general information only and is not intended as professional legal advice. Its contents are not intended to provide legal opinions and readers should, therefore, seek professional legal advice.