When the time comes for a startup to part ways with a consultant or an employee, founders should understand their legal obligations. This primer will guide you through this difficult situation.

Benefits of written agreements

When it comes to termination, having a written agreement with your consultants and employees can save a lot of grief (and money). As uncomfortable as it may feel to discuss termination terms during the hiring process, founders will be glad they did if and when it comes time to terminate a team member. Usually, startups can get some advice on a template agreement, and then manage the execution and delivery of those agreements without significant external advice. When facing a termination situation, it is usually a good idea to seek at least some cursory legal advice.

Terminating consultants

Ending a work relationship with a consultant is usually a little more straightforward than ending one with an employee, as the startup’s termination obligations depend principally on the consultant’s and the corporation’s agreement. They are generally not subject to any “cause” or “without cause” analysis, as they are with employees. If no written agreement exists, it will come down to determining what agreement may have been implied between the parties. At worst, a start-up might be required to provide a consultant with some period of advance notice of termination commensurate with the nature and term of the contract.

Terminating employees

The obligations concerning the termination of employees are more complicated and typically represent a combination of your legal obligations under employment standards legislation as well as contractual obligations. Your contracts with employees should describe, in no uncertain terms, what each employee is entitled to when terminated. If you don’t have a written employment contract with your employees or your contracts don’t deal with termination, determining what “reasonable notice” an employee is entitled to will involve a subjective review of applicable court cases and law. The Ontario Ministry of Labour describes the applicable statutory minimum notice periods, and you should refer to these in preparing for a potential termination. In addition to this period of minimum notice, you will owe your employee any outstanding wages and accrued vacation. Finally, the corporation will have to issue a record of employment within five days of the termination date in accordance with EI legislation. The Government of Canada offers an online guide to assist with this.

Release of additional claims

If, as part of the termination process, the startup makes a payment or provides consideration in excess of terms in your written agreement or applicable employment standards legislation, it can make this payment conditional upon receiving a full and final release of any additional claims from the terminated consultant or employee. Securing a release is worthwhile for future due diligence purposes, but is not absolutely required should the process prove difficult. Certainly founders should not defer to unreasonable demands in order to obtain one.

Continuing obligations

At a minimum, your written agreements with consultants and employees should cover the continuing obligations of confidentiality in regards to the startup’s proprietary information. You might also consider non-competition and non-solicitation covenants that survive the termination of the employment or consulting relationship. Founders should not over-estimate the value of covenants restricting the business activities of ex-employees. However, given the challenges and costs associated with enforcing such covenants, their absence does not typically prove fatal to the start-up, and is not necessarily a due diligence “must-have” for potential investors and buyers.

Lastly, your written agreements should specify the procedures to do with any outstanding stock options or restricted stock arrangements held by terminated consultants or employees. Typically, terminated individuals have a limited period to exercise any such rights, after which the rights expire forever.
This article was produced by James Smith and Shane MacLean and is made available through the generosity of Labarge Weinstein Professional Corporation.