Three Common Employment Law Pitfalls for Small Business Owners

Hiring your first employee can be a joyous but risky step for any small business owner/manager. In the midst of dealing with the many steps required to open a business and the optimism that comes with securing a good employee, it may be easy to overlook the legalities of an employment relationship.

As employment lawyers, we see many employers make the same mistakes and end up paying for it when the employment relationship ends. Here are some common pitfalls in hiring employees and how to avoid them.

Hiring Employees Without Using Written Employment Agreements with Termination Clauses

Some businesses may not use any employment agreements when hiring employees. Others may use employment agreements or letters of hire that do not address termination.

In Canada, employees without enforceable termination clauses are entitled to “reasonable notice” or severance in lieu if they are terminated without cause. Reasonable notice awards are highly discretionary, unpredictable and onerous; it can often be one month per year but sometimes more. For example, a 12-year employee that was hired without a contract could be entitled to 12 months or more of working notice and/or severance.

To avoid paying reasonable notice, employers should have an employment agreement that includes a termination clause. A valid termination clause can define and limit notice or severance. The termination clause can limit the employer’s liability to as low as the Employment Standards minimum, which is roughly one week per year of service to a maximum of 8 weeks. In the example above, the same employee with such a termination clause would be limited to 8 weeks of notice or severance.

Hiring Employees on Fixed-Terms

Some employers find comfort and certainty in hiring employees on a fixed-term contract (i.e. for a defined period).

However, if the fixed-term contract does not address the amount of notice or pay required on early termination, then the employee will be potentially entitled to severance equal to their pay over the balance of the term if terminated early without cause.

For example, if an employee is hired on a two-year fixed-term contract but is terminated only one year into their employment, they are potentially entitled to severance equal to their full pay over the remaining year.

To avoid this, the employer in the example should have had a termination clause limiting the employee to a specified amount of notice or severance on early termination. Alternatively, the employer could also choose to employ the same employee on an indefinite term, using a termination clause as discussed above.

Yet another risk with fixed term hires is that if the employment continues beyond the term with no new agreement signed, which happens more often than not, the employee reverts to entitlement to reasonable notice on termination.

Failing to Pay Salaried Employees for Overtime

It is a common misconception that “salaried” employees do not get overtime pay.

In fact, with the exception of “managers” and some specific professions and occupations listed in regulations, all employees are generally entitled to overtime pay under BC’s Employment Standards Act. It does not matter whether the employee is paid on salary, per hour or even by commission or piece rate. What matters is whether the employee falls into an overtime-exempt category based on their actual duties and responsibilities.

A “non-exempt” employee working over 8 hours a day or over 40 hours a week is entitled to overtime pay. Under the Employment Standards Act, employees can file a complaint for unpaid wages they are owed from the past 12 months.

Employers should ensure they correctly “classify” employees as overtime eligible or exempt. For those who are overtime eligible, overtime hours must be managed. There are a few ways to limit overtime wage liability, including averaging agreements, overtime banking and offering an “overtime allowance”.

Additional Resources

Here to Help

In 2022 and beyond, Small Business BC is here to help with every aspect of your small business. We’ve got a range of live business webinarsfree resource downloads, and one-on-one business advice to help take your business to the next level.