All you had to do was stay

Exclusive to Canadian HR Reporter from Rudner Law.

In HR law, there are some absolute rules, and then there are some points for which the rules are not all that clear.

One of these points involves resignation provisions that impose an obligation on the employee to pay the employer a certain amount if they resign during a prescribed time period. As a Taylor Swift fan, I refer to these provisions as “All You Had to Do Was Stay” clauses, after one of my favourite tracks from her 1989 album.

Are these clauses lawful? In theory, yes, but as will be discussed below, such provisions are difficult to enforce and must be drafted carefully.

Key question: Penalty or damages?

Since the loss of an employee can substantially impact an employer’s business, it is understandable that some employers want to implement provisions in their contracts that disincentivize employees from leaving soon after they are trained and/or without giving sufficient notice of resignation. To that end, employers can provide that an employee must pay a specific amount if the circumstances of the resignation are as described in the contract.

As it can be difficult enough to enforce such a provision, one proactive approach is to include an agreement in the contract that allows the employer to deduct the resignation amount from the employee’s wages.

In Ontario, the Employment Standards Act, 2000 (ESA) allows employers to deduct amounts from their employee’s wages under specific circumstances. The ESA does not expressly prohibit deductions in the context of resignations; it is lawful for an employer to deduct from an employee’s wages if the employee authorized the deduction in writing, and the employer provided a specific amount to be deducted. Thus, a resignation provision allowing the employer to make a deduction from the employee’s final pay, for example, should be permissible.

Case law and the ESA Interpretation Manual provide additional guidance for resignation-related deductions. As long as the deductions do not result in the employee’s wages going below the minimum wage for the period in question, deductions are impermissible when:

• they amount to a penalty
• the employer fails to specify the amount of notice of resignation the employee must give
• the employer does not specify the amount that will be deducted.

In sum, resignation deductions are permissible if they are on account of an estimate of the damages that the employer suffered as a result of the resignation, rather than a penalty, and the amount is specified or specifiable. The amount must reflect a genuine pre-estimate of damages and not be disproportionate to what the employer could actually suffer as damages from the resignation. The specific amount cannot be arbitrary, and must be based on a calculation of what the employer could lose as a result of the employee’s resignation.

Additionally, the provision must set out a clear resignation notice period, or otherwise clearly delineate the time period where the resignation would trigger the employee’s obligation to pay.

While resignation provisions setting out deductions from an employee’s pay are permissible, even when setting out a specific amount it is difficult to predict whether a court or tribunal would find the sum a penalty, or a reasonable pre-estimate of damages. For instance, in Rainbow Concrete Industries Limited v Kavan Cheff-Burns, the employer specified that if the employee resigned within the first six months of service, $1,500 would be deducted from his final pay.

The court found this to be a penalty rather than a pre-estimate of damages, because the amount did not relate to an actual cost the employer incurred, and amounted to a clawback on wages.

Thus, employers cannot rely on these types of clauses with the same degree of confidence that they would have for a properly drafted termination clause, for instance.

Practical advice

We often advise our clients to approach employee retention using carrots rather than sticks. Incentives such as benefits, working from home, and other perks are an effective way to encourage employees to stay. Retention bonuses are also effective tools in this regard; instead of deducting wages if the employee leaves, the employee gets a bonus if they stay for a specified period of time.

From a practical perspective, incentivizing employees to stick around by providing bonuses or generous perks is advisable because it helps retention and can also build a positive work environment.

However, we understand that sometimes employers want to signal that all employees have to do is stay. In some industries and workplaces, it is important for some employers to have a resignation provision, even if its enforceability is not guaranteed. For these employers, incentivizing employees to give proper notice, or to stay for a certain amount of time, is more important than necessarily enforcing the provision. It is not all that unusual for employers who would see a significant business disruption if an employee leaves before finding a replacement, for example, to value these kinds of clauses.

In these cases, we strongly advise employers to draft such provisions with the assistance of experienced HR counsel. HR counsel can help employers calculate a reasonable and non-arbitrary pre-estimate of damages in the event an employee resigns without proper notice, and will ensure that the employee’s resignation notice requirement is reasonable.

David Gelles is an associate at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].