An Ounce of Prevention: The Benefits of Dental Employment Contracts (Part 1)

A question we often receive from dentists who run their own practice is: “What are the benefits of having written dental employment contracts in place?” Often (and unfortunately), this question comes too late, and a dentist employer is already entangled in a costly legal dispute with a former employee. The simple answer to this question quickly becomes evident: Employment contracts provide the dentist employer with protection and certainty of terms, both during, and at the end of, the employment relationship.

Over the course of two posts, we will provide you with an outline of the benefits of implementing dental employment contracts in your office, as well as information on how the implementation process must be handled.

So, what are the benefits?

The best place to begin discussing the benefits of written dental employment contracts is actually at the end of the employment relationship – the threat of a lawsuit. In the dental employment context, there are numerous employment law issues that arise repeatedly. The most common of these is a claim for wrongful dismissal. When an employer terminates the employment relationship without cause, the law dictates that the employee must be provided with notice of the termination, or payment in lieu of notice. The Employment Standards Act (the “ESA”), which governs most dental employment relationships in Ontario, stipulates the minimum required notice that an employer must provide an employee when the employment relationship is being terminated without cause. These notice requirements are based on length of service, and are as follows:

Length of Employment Notice Required
Less than 3 months None
3 months but less than 1 year 1 week
1 year but less than 3 years 2 weeks
3 years but less than 4 years 3 weeks
4 years but less than 5 years 4 weeks
5 years but less than 6 years 5 weeks
6 years but less than 7 years 6 weeks
7 years but less than 8 years 7 weeks
8 years or more 8 weeks

 

Employers who employ more than 50 employees, and have payroll in excess of $2.5 million have additional obligations, but that is beyond the scope of this article.

However, the ESA only outlines the minimum notice requirement. Common law principles expand on these notice requirements. The common law is judge made law. There is no defined rule as to the amount of notice an employee may be entitled to at common law. However, as a very rough rule of thumb, Courts will typically award wrongfully dismissed employees approximately one month’s pay per year of employment. There is any number of factors that courts will consider when determining the appropriate notice period, such as length of service, age, and employment responsibilities. The amount of notice will fluctuate based on the applicability of these factors.

A properly drafted dental employment contract can limit the amount of notice to which an employee is entitled, to the ESA minimums. The potential savings to an employer can be substantial!

Take the case of an employee that has been working in your practice for 24 years and earns $800.00 per week. Under the common law, if you were to let this employee go without cause, you could be liable for up to 24 months of severance, or more. This could cost you $83,200.00. However, if the notice requirement is properly limited to the ESA minimums in a written dental employment contract, the maximum severance you would have to pay in the case of a 24 year employee would be 8 weeks. This would only cost you $6,400.00. This results in a potential saving to the employer of $76,800.00. While you are always entitled to provide the employee with more pay, having the notice obligations limited to the ESA minimum puts the ball in your court.

What other benefits do written contracts provide?

Sale of a practice

We are often consulted on the sale of an existing practice, as to how the vendor should handle existing employees.

The general rule is that employment contracts are not assignable, meaning that the rights and obligations under the contract are exclusive between the current employer and employee, so that the contract cannot be transferred to a third-party, such as a purchaser. However, there is an important distinction between a share sale and an asset sale.

In a share sale, the vendor sells the shares of her Dentistry Professional Corporation to the purchaser. If the practice is to be sold by way of a share purchase, then the purchaser will essentially step into the shoes of the former employer. The identity of the employer corporation does not change. From an employment law perspective, the share transaction does not automatically terminate the employment relationship. In this situation, the employees of the former employer are given credit for the years of service they spent with the former employer, and will be deemed continuous employees for the purposes of measuring their length of employment. So, in the scenario of the 24 year employee, a potential share purchaser of a practice would be saddled with the vendor’s previous termination obligations. This could seriously affect the value and marketability of a practice, as potential purchasers will be leery of assuming such a large potential liability.

However, through a properly drafted dental employment contract, the purchaser can obtain the benefit of previously implemented employment contracts, so long as the employment contracts contain a clause that stipulates the agreements may be assigned to a purchaser. Therefore, the share purchaser will obtain the benefit of the clause in the employment contract that stipulates how much notice an employee will be provided on termination. The potential savings could be significant. Properly drafted dental employment contracts will make your practice more marketable, as potential purchasers will not be deterred by the prospect of inheriting common law notice termination obligations usually attached to long-standing employees.

However, in the case of an asset purchase and sale, the situation is different, and generally more complicated from an employment law perspective. When a company is sold by way of an asset sale, there is a resulting change in the identity of the employer and, in principle, all employees are terminated at the moment of sale. The ESA provides statutory protection for employees, and mandates that employees who are re-hired by the purchaser will receive credit for past years of service when a business is sold. Therefore, even in an asset sale, so long as the purchaser re-hires even one employee, they will inherit that employee’s entire length of service with the vendor. Unfortunately, in an asset purchase, the employment contracts are not assignable to the new purchaser. This creates a problem whereby purchasers will be encumbered with the employees’ previous years of experience, but will not have the benefit of an employment contract that caps the notice entitlements. A purchaser in an asset sale will have to implement new dental employment contracts with existing employees in order for the purchaser to obtain proper protection from potential employee termination obligations. There is a strict process involved in implementing new dental employment contracts with existing employees, which will be covered in the next posting.

While employment contracts are generally not assignable in an asset sale, there is still a significant advantage to the vendor in having properly drafted dental employment contracts in place at the time of an asset sale. Situations will arise where the purchaser in an asset sale does not wish to offer employment to the vendor’s long-standing employees, as they are not obligated to do so. This will leave the vendor liable for the cost of terminating the employees in advance of the sale. If the vendor has a properly dental employment contract in place that limits the notice entitlements upon termination, she will not be exposed to significant notice obligations in the event certain employees are not assumed by the purchaser.  As outlined previously, the maximum exposure will be 8 weeks’ notice at the time of dismissal. A prudent vendor could simply give the employee notice 8 weeks’ in advance of the sale, that their employment will terminate on this date, and will not be out of pocket for any notice obligations.

This arrangement can also benefit the purchaser. If the purchaser has reservations about assuming long-standing employees, these fears can be minimized. The vendor could dismiss any of the long-standing employees by providing eight weeks’ notice in advance of the sale, and the purchaser would then be free to offer those employees re-employment. The new dental employment contract offered by the purchaser can also contain a clause limiting the employee’s notice entitlements to the ESA. If the employee refuses to sign the employment contract, then that will be the end of their relationship with both the vendor and purchaser, and neither will be responsible for any additional notice pay. The vendor minimizes their severance obligations, and the purchaser is provided with the opportunity to implement similar dental employment contracts with the employees she wishes to retain after the sale.

Retirement

When dealing with employees, retirement has the same legal effect as selling your business. The closure of the business will result in a termination of the employment relationship, triggering an obligation for the employer to provide notice pay to employees. While many practitioners have a well thought out retirement plan, with a fixed date for retirement well down the road, sometimes life does not cooperate. Many practitioners make the decision to retire within a relatively short amount of time. Others have life changing events that necessitate retirement before the date they originally planned.

When it comes to retirement, it is always advisable to have properly drafted dental employment contracts in place for all employees restricting the amount of notice each employee is entitled to. In the event that you are forced to retire earlier than you had planned, then the amount of notice you must provide to an employee that the business will be closing can be capped at the ESA minimums. This will provide more flexibility in your retirement plans. In the case of the 24 year employee, instead of having to provide 24 months of notice, the prudent dentist will only have to provide a maximum of 8 weeks notice of their intention to retire.

Many practitioners lease premises for a fixed amount of time, with the view to retiring at the end of the term of the lease. Before the lease ends, you will need to give your employees proper notice of termination of their employment. If this is not done properly, and you only realize 3 months before the end of the lease that you have not provided adequate notice to your employees, you could be left with significant liability for the employee severances. This could ultimately decimate your retirement funds (and plans!).

Having properly implemented dental employment contracts means that the amount of notice you will be required to provide will be limited to the ESA minimums. This will make the transition easier and more manageable, in terms of ending your lease.

Death

For unincorporated dentists, in the unfortunate situation where the dentist passes away, employees will have a claim against the estate for wrongful dismissal. Death is not just cause to terminate an employment relationship. While these issues can be minimized through proper estate planning, part of that planning should include ensuring that any claims for wrongful dismissal are minimized as much as possible. By having proper dental employment contracts in place with your employees limiting the amount of notice to which employees are entitled to the ESA, you can ensure that in the event of your passing, your estate heirs will not have to pay large severances for dismissal.

Non-solicitation clauses for hygienists

Another common situation that we repeatedly deal with is non-solicitation and non-competition clauses. Since the Dental Hygienist Act was amended in 2008 to allow hygienists to self-initiate, there is an ever-growing concern that hygienists will take patients away from their principal dentist’s practice. All of our hygienist employment agreements include a clause that prohibits the hygienist from soliciting patients both during and after the employment relationship. This is commonly referred to as a non-solicitation clause. This is to be contrasted with a non-competition clause. A non-competition clause bars a former hygienist from competing against a former employer for a specified amount of time and within a defined geographical area. A non-solicitation clause is a less onerous covenant than the non-competition clause, and is aimed at preventing a hygienist from soliciting a former employer’s hygiene patients.

Ontario courts are reluctant to enforce non-competition clauses, whereas a non-solicitation clause that is reasonably restrained in timing (ie. 2 years) is usually enforceable, as it is considered to represent a more reasonable balance of the competing interests between the employer and employee. The courts will ask what interest the employer is attempting to protect through the restrictive covenant. Dentists do not have a proprietary interest in potential patients of the practice, but only the existing patient base. Therefore, a non-solicitation clause will typically serve to protect this interest. A non-competition clause, prohibiting a departing hygienist from practicing at all within a defined geographical area for a specified period of time, is usually seen as an unreasonable restraint on trade.

Only in exceptional cases will a non-competition clause be upheld in an employment context.

An appropriately drafted non-solicitation clause offers protection for an employer without unduly compromising a former hygienist’s ability to work in his chosen field. Unlike the non-competition clause, the hygienist is able to immediately commence employment in their chosen industry, and within the same geographic area. This interest is balanced with the employer’s proprietary interest in their existing client base.

It is important to have a properly drafted non-solicitation clause in a dental employment contract, as a clause that is overly broad may be deemed unreasonable by the courts, and therefore struck from the agreement all together. This would deprive the employer of the very protection they sought in the first place.

As you can see, properly drafted dental employment contracts provide a number of significant benefits to employers. In the next post, we will discuss the process involved in implementing the new dental employment contracts, to ensure that the contracts are enforceable.

If you would like to discuss the benefits of dental employment contracts for your business, please contact Matthew Wilton  at matthew@wiltonlaw.com, or Paul Martin at paul@wiltonlaw.com, or by phone at 416.860.9889.

*The foregoing is not intended to be legal advice and is provided for educational purposes only.  You should retain a lawyer to seek advice prior to taking any legal steps.

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