8. Labour Law

Labour Law – Employment

The alternative to an agency relationship is the employment relationship. Historically speaking, employment is rooted in the masterservant relationship developed in historical England. However, today an employment relationship is rooted in contract law. If you work for someone you are, in fact, working under contract.

Beyond contract law, several specialized statutes have been developed to define and establish terms and conditions regarding the employee and employer relationship. These specialized statutes are different depending upon the provincial jurisdiction in which they were created. Under the Canadian constitution, the federal government has jurisdiction over employment matters relative to their areas of control (interprovincial transportation, the Canadian military, and federal government departments are examples).

It should also be noted that there are number different types of employee relationships. For example, an employee could be part-time or full-time, temporary or permanent, in a services or employment contract or some combination of these. Generally speaking, these various forms of employment have different rules governing how the relationships are managed. For the sake of simplicity this section will refer to all these categories as simply ‘employment’.

As a reminder, vicarious liability establishes that an employer is liable for any tort resulting from an employee’s actions within the scope of their employment or closely related to the employment context. As a result, employers should always be mindful of the actions of their employees to ensure that they reduce the overall level of risk associated with vicarious liability.

What is an employee

The recent emergence of the ‘gig economy’ has become a feature of the employment landscape. Gig economy refers to freelance or temporary forms of labour in which contractors supply services to an organization outside of the traditional employer / employee relationship. This form of work arrangement may enable employers to avoid many employment legislation requirements that apply to employees but do not apply to those who operate in the freelance or ‘gig’ space.

As an example, if a person is an employee, and their employer choses to terminate them, then the employer would typically owe the employee a notice period or a payment in lieu of a notice period. However, if the employee is a service provider under a services contract, the contract could stipulate that no notice period would be provided and as such the person could have their contract terminated without notification. This can be beneficial to employers as it reduces termination-related costs and can increase ease and flexibility around hiring replacement workers.

The rise of the gig economy has led to several contentious issues as some employers have shifted traditional employee / employer relationships to that of contracted service providers. While this may have a benefit to employers in both flexibility and cost savings, it can potentially hurt employees by increasing the precarious nature of their employment status. Recently, several cases have been filed (Canadian Union of Postal Workers v Foodora Inc., 2020 ON LRB is one example) to determine what it means to be an employee.

To clarify who is an employee and who is a services provider, Canadian law provides a test which the courts can apply to determine the nature of the relationship regardless of contract type. It is a two-step test in which both steps need to be met in order to establish an employee relationship.

Control Test

The first test is known as the control test. The control task asks the question of whether the employee is working under the direction of the employer. In effect, it asks, if the employer is telling the employee not only what to do, but when and how to do it. This contrasts with a services contract supplier where they control their own hours; and in most cases, how to perform the work being done. If the person providing the service under a service contract is being directed by the employer on how and when to do their work, the court could interpret that relationship as an employee / employer relationship rather than a services contractor relationship.

Organizational Test

The second test is what is known as the organizational test. The organizational test seeks to establish if the person doing the work is an essential part of the organization by asking if the enterprise would be negatively impacted if the worker left? If negative impact is established, then the worker in question would be viewed as an integral part of the organization and classified as an employee and not as a services contractor.

The benefit to the organization of a services relationship is that the employer can contract the specific terms and conditions of the working relationship and does not need to abide by the Ontario Employee Standards Act (ESA). However, organizations should be careful to ensure that these are truly contract relationships and not employee relationships being portrayed as services contract relationships in order to bypass any provision of the ESA. If the relationship is determined under these two tests to be that of an employee / employer relationship, then the employer is obligated to follow all of the rules and regulations set forth under the jurisdiction’s statues. In the case of Ontario, this means following the Ontario Employee Standards Act.

Employer Obligations

Every employer in Canada has inherent obligations to employees. The first obligation an employer has is to create a safe workplace. Traditionally, this meant employers protected employees against workplace accidents related to the physical dimensions of work. However, this requirement has expanded in the past number of years to include psychosocial factors (bullying, harassment, overwork, are examples). Employers should do everything they can to create a safe work environment for their employees to ensure efficient and effective operations. Under the ESA, employees in Ontario have the right to refuse unsafe work and employers are prohibited from penalizing employees for refusing unsafe work.

Employers are also obligated to provide appropriate direction to the employees; communicating to employees know what to do, when to do it, and the expected level of quality. Employers should be clear in their instruction so that the employee fully understands the expectations and performs the tasks assigned appropriately.

Employers are obligated to provide pay to the employees for the work performed, as well as any reimbursement for expenses they may incur. Additionally, employers are required to provide the appropriate tools required to employees to perform their work. These tools could include computers, machinery, paper/pens, and other required instruments or materials required to fulfill employment duties.

Employee Obligations

Employees are not free to act as they want; they too have obligations to employers. Employees are expected to be competent in the job functions required, have the skills that they claim to have, and agree to perform the work to the best of their ability. Generally speaking, employees should also be punctual and honest. Most of all, employees have a duty of loyalty to the employer. This means that they can’t work for one company and then do work or provide information to the competition.

Managers, executives, and employees who are critical to the business have an obligation of fiduciary duty to the employer. In effect, they must always act in the best interest of the employer and not to the benefit of themselves. Regular employees do not have a fiduciary duty to the organization.

Managing Staff

It is beneficial to both employers and employees to maximize the potential of each employee. Good managers understand, and are fully aware of, the employees’ rights and obligations. Great employers use fair employment practices to establish good working relationships. A key factor in achieving a positive relationship is to establish clear policies and procedures which govern the employee / employer relationship and adhere to all labour practices and statutes within the jurisdiction in which the organization operates.

From time-to-time employees will not meet the expectations set by the employers and, as a result, corrective actions may need to be undertaken. One tactic for managing successful corrective action is a process known as progressive discipline.

Progressive discipline is beneficial in that it not only protects an organization from potential liability, but more importantly, helps the employee to fully understand the expectations of the employer so that they can perform the duties of work as required. Progressive discipline is a process which is initiated and followed in situations where problems with performance or behaviour are identified. The identified issues or concerns are addressed with the employee directly in order to advise and allow the employee to take corrective action. If the employees corrective action succeeds and expectations are met and both the employee and employer are satisfied, no further action is necessary.

Sometimes the identification of an issue and the corrective actions applied do not lead to the intended results and may require additional intervention by the employer. In such cases, additional progressive discipline steps may be needed to provide the employee subsequent opportunities to take corrective action. The progressive discipline process provides a record of the employee’s success or failure to achieve the expected level of performance and may result in consequences to the employee’s continued employment.

Ultimately, when progressive discipline fails to achieve a satisfactory level of performance by the employee, then the employer is within their rights to terminate the employee relationship. Employers need to carefully manage this process, as an error or missed step by the employer, could lead to potential liability. To minimize exposure to liability, employers typically document all progressive discipline activities.

It should also be noted that the approach to progressive discipline needs to be considered. Aggressive physical behaviour or a menacing verbal or written communication could be construed as bullying which would be a violation under harassment regulations in the Province of Ontario.

There may be times when employers discover that employees are acting inappropriately and against the goals of the organization. For example, an employee may be stealing from the organization, may be committing fraud, or may be treating other employees in an inappropriate manner. In these cases, it is critically important that employers document such situations in detail, focusing on the facts. It is also important that employers do not forget that employees have rights which they must respect.


At some point it may become clear that the employee / employer relationship will need to be terminated. Often employees believe that they are guaranteed employment if they just do their job, but that is not the case. Employers have the right to terminate employees. There are two ways in which an employer can terminate an employee relationship. The first is to provide notice under common law and the second is known as providing just cause.

In common law, the employer has the right to terminate the employee relationship but they must do so by providing what is known as ‘reasonable notice. The concept of ‘reasonable’ is often difficult to ascertain. Reasonable notice is generally interpreted as the length of time an employee would need to find a similar job (similar responsibilities, status/title, similar pay).

The actual ‘notice period’ duration can vary dramatically depending upon the employees level of education, work experience, age, marketable skills, and other factors. As an example, imagine a 63-year-old employee, who is two years away from retirement with an educational background that is not in demand, narrow experience, and limited modern skills. It is likely that this person would require a longer notice period then someone who possesses contemporary experience, skills, and educational credentials.

Employers should know that the courts are increasingly sensitive to the difficulty in finding new work opportunities and this has, in some cases, led to awards of larger notice periods than in the past. To ensure that the correct notice period is provided to terminated employees and to limit the exposure of a wrongful dismissal suit employers should consult with legal experts.

Employers who know they no longer need an employee typically contact them to inform them that they are no longer required. One option in such cases is to provide the employee sufficient notice of their release from employment. The employee continues to work until the notice period is completed at which time their employment is terminated. This is often the case in large organizations where the employee does not pose a risk and may have other employment options within the company.

A challenge with this option is the employee continues to work for a period of time knowing that their employment will soon be ending. This may create problems if the employee were to act in an inappropriate manner. As a result, many employers choose to provide payment in lieu of notice to minimize risk.

Payment in lieu of notice is an amount of money equal to the notice period required under common law paid to an employee. For example, if the notice period is three months, and the employee receives $5000 a month in salary, then the organization would pay the employee $15,000 as a total payment in lieu of notice. This is an example of a lumpsum payment, but the employer could elect to keep paying the employee a regular salary until the end of the notice period. The employee would receive payment over the length of their notice period but would not actually be working for the employer.

It should be noted that pay in lieu of notice should include any payments owed to the employee like commissions or bonuses. While not required, many organizations continue to provide the terminated employee with insurance and health benefits during the notice period to help mitigate the loss of employment. Lastly, many employers also offer outplacement services to provide employees support during their transition to new employment.

In Ontario the Employee Standards Act (ESA) sets minimum guidelines for notice and Ontario courts tend to interpret the ESA guidelines accordingly, but the minimum standards may not qualify as appropriate notice in some instances. For example, the ESA states that two weeks’ notice is the minimum notice requirement for any employee with less than one year with a company. However, if the employee has limited skills that are not easily transferable to new employment opportunities the courts may impose a longer notice period.

Just cause

The second way an employer can terminate an employment relationship is through just cause. Just cause is typically established by the following conditions:

  • Not meeting the expectations of the employer
  • Not meeting the obligations that the employee has to the employer
  • Employee incompetence
  • Employee misrepresentation

Inability of an employee to complete the work tasks as assigned may lead to a termination of employment within the meaning of just cause. If an employee cannot fulfill their duties and assuming that the work tasks are reasonable and fair, they may be released. It should be noted that human rights regulations state that if an employee has a disability which prevents them from completing the tasks required, that the employer must make any reasonable accommodation to support the employee with a disability to perform the tasks required.

If an employee acts inappropriately to a degree that causes harm to the organization or to other employees within the organization the unacceptable conduct could qualify as just cause. In such cases, it is important that the employer identifies the inappropriate actions of the employee and explains why the actions are egregious. The employer should use any appropriate means to support corrective action by the employee (counseling, education, and coaching are examples).

In cases where an employee is unable to perform the tasks because they do not have the skills to complete the work required, an employer may dismiss the employee for just cause. An employer has an obligation to identify the specific areas of incompetence and support the employee in developing the necessary skills where practicable. If the employee is not able to perform the duties of their job at the required level, then the employer has the right to end their employment.

An employer may have just cause to terminate an employment relationship in cases of misrepresentation. Misrepresentation occurs where an employee has led an employer to believe that they had certain skills, credentials or experience which they did not have.

In cases where just cause is invoked the employer is not required to provide a reasonable notice period. However, organisations may elect to terminate an employee following a progressive discipline and appropriate notice process to save them time, money, and potential risk related to proving just cause.

Wrongful dismissal

Wrongful dismissal is often misinterpreted by employees. Wrongful dismissal within Ontario labour law refers to situations in which an employee alleges that they were not given the appropriate notice period or payment in lieu of notice. Most disputes between employers and employees involving termination are concerned with the notice period provided rather than the reasons for termination.

Under tort law, anyone who has been damaged has an obligation to make all reasonable efforts to mitigate the losses they have incurred. In Ontario, an employee who has been terminated is expected to make all reasonable efforts to find suitable employment of equal value to that of their previous position within a reasonable period. An employee cannot seek a larger payment in lieu of notice and then take no action to find new employment.

Constructive Dismissal

Has an employer ever asked you to do a different job than the one you normally do? With the fast pace of business today, this is a common practice on employers. What if that job position were a demotion? If the change in job is interpreted by the employee as a demotion, then the employer could be engaged in a ‘constructive dismissal’. Constructive dismissal describes situations in which an employer changes an employee’s job with the intent to demote, frustrate, or alienate the employee to the point where they resign.

Imagine an employer has an employee who, if terminated and paid in lieu of notice, the notice period payment would be one year salary which might be a large amount for the employer. However, if the employee were to quit, then the employer would not be required to pay in lieu of providing appropriate notice. Common law recognizes that if this practice were allowed, then employers would demote employees or otherwise encourage employees to quit to avoid providing appropriate notice period payments. As a result, employers cannot unilaterally change job requirements with an implicit or explicit intention to motivate an employee to resign.

It is the employee who must prove constructive dismissal and it may be challenging to show that the job change in question is a demotion. Depending on the circumstances and perspectives, changes to job duties could be interpreted as a lateral move or a promotion. An additional challenge is that the employee is required to quit their job and then bring an action against the employer for constructive dismissal. This course of action results in no access to any form of termination payment and the employee is responsible for funding their own legal bills.

Employee Resignation

An employee has obligations to the employer if they choose to terminate an employee / employer relationship. An employee may quit for just cause if they are asked to perform work that is illegal, if they’re not paid, if they are placed in dangerous situations, if terms of the employment contract have been breached, as well as for other reasons. In such situations, the employee can quit immediately with no further obligation to the employer.

Alternatively, an employee may resign by providing reasonable notice to the organization. There are no specific guidelines describing a required notice period for employees who choose to terminate their employment. However, professional practice suggests two to four weeks is a reasonable notice period for any employee to transition their work requirements to a new employee.

Employees should be aware of and ensure that they leave their employment while still meeting their obligations to the employer. For example; they may not take confidential information, trade secrets, technology, products, or other tangible or intangible property when they leave the organization. They may not take any customers with them to their new company, and they are required to comply with all the terms and conditions under the employment contract in which they were hired.


Icon for the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License

Business Law and Ethics Canadian Edition Copyright © 2023 by Craig Ervine is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Share This Book