Contractors & Copyright – don’t be held over a barrel

Most of the time I meet a new client, they’re in some sort of crisis. Often it’s a crisis of their own making, in which they’re so deeply mired in that they can’t self-extract. I greatly prefer to work on constructive projects where problems are anticipated, planned for, and ideally never become reality. I’m sure every entrepreneur feels the same way. Far too often, however, my first piece of work for a business is in dispute resolution rather than project-building. Some mistakes that seem like molehills at the time turn into mountains more quickly than anticipated. One common mistake that many small business owners make is to assume that they own all of the creative works that were made for their business by outside contractors – website and branding, most frequently.

Like your Business Depends On It…

For many companies nowadays, creative works – logos, graphic design, custom-built website code – are at the very core of their business. They can be part of your lead generation, customer services, e-commerce, promotions, and product education. For web-based businesses, much of the business’ actual value is in its “goodwill” – or the je ne sais quoi that makes your business profitable. Your web store ain’t going to generate much profit if it’s not online, well-maintained, and has proper user support, after all. Your brand ain’t going to expand very well into new markets if you’re restricted in how you can use your logo and graphics. If you ever hope to sell the business, pass it on to your kids, or bring investors on board, they’re going to want to know that the value of the business is secure. This is why it’s important to be certain of what your business owns. We do this by getting the rights to use creative work that’s made for your business in the way you want to use it. We law-nerds call that a “license”.

Without a license in place, an unscrupulous contractor can hold your company over a barrel for more money and threaten copyright enforcement proceedings if you use what they created. Shady? Hell yes, but it happens disturbingly frequently. I’ve seen it over and over, especially with coders building custom websites for internet-driven businesses. The designer gets to 80-90% completion so the business is fully committed, then work “stops while we work out licensing terms”. All of a sudden they want an annual fee to use the code, to be hired on to maintain and support the site, or to be paid every time you re-use the logo in a new setting. In the meantime, they lock down the 90% complete work so you can’t access it, and your business hangs in limbo.

That’s why It’s hugely important to negotiate the terms of the license – that is, the things you are and aren’t allowed to do – before you start working with the contractor. That’s the point where you, as the customer, have the most leverage, and can get the terms that best suit your needs. There are lots of graphic designers and web-coders out there – it’s a buyer’s market – so don’t be afraid to shop around. It’s easiest make sure that there are terms of license in the services contract that you sign, or an “assignment” of the rights that you need to deal with the work as needed. Otherwise, you’ll need to negotiate a side agreement. Only fools rush in – as soon as you’ve paid the contractor and work has begun, your leverage decreases. Now they have two things you need – your money, and the creative work – and you have neither.

Copyright

Our first stop on this magical journey into licensing is a quick look at copyright. Copyright is the right to produce or reproduce the creative work or any major part of it, to publish or exhibit the work, to perform it, communicate it, rent it, or to authorize any of the above. It applies to all original literary, dramatic, musical, and artistic works, performances, sound recordings, computer programs, and communication signals, which I’ll call “creative works”. Copyright is designed to protect the creator of the work by giving them the exclusive right to profit from what they made.

Copyright protection comes into being as soon as the work is made, and applies to work-in-progress as well. It’s an automatic thing, so the creator doesn’t have to take any steps to register it in order for the work to be protected. Registering copyright work with the Canadian Intellectual Property Office is evidence of ownership, however. Registered or not, copyright lasts for the rest of the creator’s life, plus 50 years afterwards.

Employee or Contractor?

This article is meant for those dealing with outside contractors. Most small businesses will hire a contractor or company to do their creative work – like I did for my kickass business cards – as there’s not enough work to keep a designer busy as an employee.

If you’re lucky enough to have an employee who’s skilled in the ways of creating things, you don’t need a license or assignment. Any work an employee does in the course of their duties as an employee belongs to the employer. That rule is a fundamental part of the employer-employee relationship. That rule can be opted out of by contract.

An independent contractor, on the other hand, will own the copyright in whatever they create. This is true whether the contractor is an individual, partnership, or corporation. The line between employee and independent contractor can be blurry, and there’s a lot of grey area in the law. It boils down to how much control the employer exercises over the worker. The more control – like setting hours and place of work, ownership of tools, having the chance of profit and risk of loss – the more likely it is that they’re an employee in the eyes of the law.

If there’s a chance that a worker could claim they’re an independent contractor, you’re better safe than sorry. Get a license agreement or an assignment of intellectual property rights in writing.

License

A license is a contract giving permission to do something you’re not ordinarily allowed to do. We deal with licenses all the time – a driver’s license allows you to drive a car; a software license allows you to use a computer program; a liquor license allows a bar to sell alcohol; even a Blue Jays ticket is a license to go to the game and occupy a certain seat. Here, I’m talking about the right to use a copyrighted creative work in the ways your business needs to operate.

So, what things might you want to do? The main “rights” granted in creative works include the right to:

  • Use the work
  • Make copies of the work
  • Modify or improve the work
  • Distribute and redistribute the work
  • Sub-license the work

Certain rights, called “moral rights” will always belong to the designer, and can’t be assigned to another person. Moral rights include the right to the integrity of the work, and the right to be associated with the work (or remain anonymous, as the case may be). The creator can waive their right to enforce their moral rights.

Licenses can be exclusive, meaning that the creative work was made just for you, and nobody else can have it, not even the designer, or non-exclusive, meaning that the designer can re-use or re-license out the same design. Exclusive licenses make more sense when there’s a great deal of custom work involved, the creative work is central to your business, there’s risks your competitors might steal your model, or you’re laying out some serious cash to get the work done. Non-exclusive rights work better for simpler, more generic work – like basic web design or package deals – where there’s little risk of losing out if your competitors have something similar.

The most general of all is an open-source license. Sometimes called “copyleft” or a “permissive license”, open-source means that anyone can copy, distribute, and modify the work for any purpose, and without fees. There are several types out there, with varying limits on what can and cannot be done. Many web programming platforms, such as WordPress and Drupal, are subject to open-source licenses for any “derivative” works – as in, anything that’s made to tack-on to their platform must be distributed as open-source as well.

Pro-Tips

The toughest part in negotiating a license is finding the balance point where your business is protected, but the person doing the creative work has the freedom to use the tricks of the trade they’ve picked up to continue to earn a living. That’s why it’s important to know precisely what is being licensed, and what you’re using it for. The most certain way to achieve that is with a written license agreement.

Here are a few things your business can do to make sure you’re in the best position:

  • Know what you’re going to want to use the work for, and ensure that the designer is willing to give you those rights
  • Research what the industry standards are for licensing or assignment in the designer’s field of work
  • Get the license terms or assignment of rights in writing before you pay the designer, and before work begins
  • Know for sure whether the designer is an independent contractor or employee
  • Host the work-in-progress on your own servers, not the designer’s
  • Work with designers in your own jurisdiction – as enforcing an international contract can be all but impossible

Of course, there’s no joy quite like the joy a lawyer can bring to your life by taking the dreary contract drafting work off of your hands… I happen to know a guy… 😉

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

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When do you give employees time off?

One of the more monumental-seeming tasks for a business owner is learning how to deal with employees. In Ontario, most workers are protected by law – mainly the Employment Standards Act, or ESA for short. The ESA sets out the bare minimum for workers’ rights in the Province, including minimum wage, working hours, termination & severance pay, and time off. It’s extremely important to follow those rules, as the consequences for failing to do so can be dire.

In this article, I’m going to talk about the time off part of the equation – namely, when the law requires you to grant your employees unpaid leave, and under what conditions. A few new categories were created last fall, so it’s a good refresher. It’s important to have an understanding of why and when employees can take time off so that you can build leave into your HR policy and business planning.

Not all workers are protected by the ESA, and certain parts of the law don’t apply to people in certain professions. For instance, unpaid internships are illegal in Ontario, unless you’re a professional student like in law or medicine. In that case, you can work ‘em like rented mules and pay them nothing… ever wonder why we lawyers are a humourless lot?

Vacation

Employees who are protected by the ESA are entitled to a minimum of two weeks of vacation time per calendar year. Those two weeks must be paid with vacation pay, which is a minimum of 4% of the employee’s gross wages actually earned in that 12 month period. If you’ve granted more vacation time in the employment contract, then you have to honour that amount.

Entitlement to vacation is not reduced by layoff, illness, or leaves of absence.

Unpaid Leave of Absence

Workers who are protected by the ESA, whether part or full time, permanent or temporary, may have the right to take unpaid leave for the following reasons:

  • pregnancy and parental,
  • personal emergency,
  • family caregiver,
  • family medical,
  • critically ill child care,
  • organ donor,
  • crime-related child death or disappearance, and
  • deployment as a military reservist.

An employee may be entitled to more than one of these leaves for the same event. Each leave is separate, and taking one doesn’t affect their ability to take any of the others.

Pregnancy and Parental Leave

Pregnancy leave is up to 17 weeks of job-protected, unpaid time off work. The worker must have started employment at least 13 weeks before the baby’s due date.  The employee is eligible to receive employment insurance during this leave.

Parental leave may be taken by any new parent – birth, adopting, or by relationship – once a child is born or comes into their care. Birth mothers may take up to 35 weeks of parental leave, usually dovetailing in with their pregnancy leave for a total of 52 weeks. Birth mothers who do not take pregnancy leave, and all other new parents can take up to 37 weeks of parental leave, starting within a year of the child coming into their care. Parents may, but don’t have to, take their leave at the same time as the other parent.

To be eligible, the worker must have worked for you for at least 13 weeks before the baby came into their care, and must give you at least two weeks’ notice before starting leave.

Personal Emergency Leave

Personal emergency leave is unpaid, job-protected time off work for up to 10 days per calendar year. It’s only available to employees of companies who have 50 or more employees.

This leave may be taken for illness, injury, medical emergency, or related matter of the employee, their immediate family member, or dependent. The employee should inform you as soon as possible – whether that’s before or after they’ve begun the leave.

The 10 days do not have to be taken consecutively. Part days can be counted as a full day.

Family Caregiver Leave

Family caregiver leave is unpaid, job-protected time off work to care for family members or dependent relatives who have a serious medical condition. A “serious medical condition” is evidenced by a medical certificate issued by a physician, registered nurse, or psychologist. The certificate may have listed on it a period during which the condition is “serious”, or if no time frame is indicated, it’s valid until the endof the calendar year. You may request a copy of the certificate from the employee.

Employees may take up to 8 weeks per calendar year, per family member requiring care. The weeks do not have to be taken consecutively, but taking any one day off in a particular weeks counts as having taken the entire week off.

The employee should inform you as soon as possible – whether that’s before or after they’ve begun the leave.

Family Medical Leave

Family medical leave is unpaid, job-protected time off work to care for family, extended family, or people who are “like family”, who have a serious medical condition with a significant risk of dying within 26 weeks.

A person who is qualified to practice medicine must issue a certificate stating that the individual has a serious medical condition with a significant risk of death within 26 weeks. The employee must provide you with a copy of the certificate. If the person is “like family”, you may request a copy of a “Compassionate Care Benefits Attestation” form

Family medical leave is for up to eight weeks in a 26-week period with respect to each person being cared for. If other people are taking leave to care for the same person, the eight weeks must be shared. The eight weeks of family medical leave do not have to be taken consecutively, but taking any day in a week counts as using up one week.

Again, the employee should inform you as soon as possible – whether that’s before or after they’ve begun the leave.

Critically Ill Child Care Leave

Critically ill child care leave is unpaid, job-protected time off work to provide care or support to a critically ill child. The employee must work for you for at least six months before they’re eligible to take this leave.

A critically ill child is someone:

  • who is under 18 years of age,
  • under the employee’s legal guardianship, and
  • whose baseline state of health has significantly changed and whose life is at risk as a result of an illness or injury.

A physician, RN, or psychologist must issue a certificate stating that the child is critically ill, requires the care of one or more parents, and sets out the time period of care. You may request a copy of the certificate.

The employee must give you written notice that they’ll be taking the leave, and provide a plan in writing setting out the weeks they’ll be taking off. Ideally this is done before the leave starts, but can be done after. The employee must give you reasonable notice before changing the dates in the plan.

Critically ill child care leave can be up to 37 weeks in a calendar year. If the child remains critically ill at the end of the year, the employee may be eligible for additional leaves. The weeks need not be taken consecutively, but taking one day off in a week uses up the entire week of leave.

Organ Donor Leave

Organ donor leave is unpaid, job-protected leave for the purpose of undergoing surgery to donate a kidney, liver, lung, pancreas, or small intestine to a person. Generally, organ donor leave begins on the date of the surgery, but it may begin earlier if specified in a medical certificate.

The leave is for 13 weeks, with the possibility of extension for up to an additional 13 weeks if the employee is not yet able to perform their duties. A medical certificate is required for an extension. If possible, the employee must provide two weeks’ written notice before beginning or extending the leave.

Crime-Related Child Death or Disappearance Leave

Leave is available to employees whose child dies or disappears where it is probable that it resulted from a crime. The employee must have worked for you for at least six months to be eligible for the leave. If it is probable that the child was a party to the crime, the employee is not eligible for the leave.

An employee may take up to 104 weeks after the death of a child, and up to 52 weeks after the disappearance of a child. The employee must inform you in writing that they will take this leave, and provide a written plan indicating the weeks in which the leave will be taken. In most cases, an employee must take the leave in a single period.

Reservist Leave

Military reservists, those handsome devils, who are deployed on an international or domestic operation to assist with an emergency or its aftermath are entitled to unpaid leave for the duration of the operation. For international operations, the leave includes pre- and post-deployment activities required by the military.

The employee must have worked for you for at least six months, and must give reasonable advance notice in writing of the deployment dates when possible.

General Points

  • Leave doesn’t affect the employee accumulating seniority or length of service.
  • You must continue to pay employer contributions to pension, life & health insurance, accidental death insurance, and dental plans. If a benefit plan requires both employer and employee contributions, and the employee notifies you in writing that they will not be making their payments, then you don’t have to pay either.
  • The employee is entitled to come back to the same position they held before their leave, if it still exists, or to a comparable position if it does not.

Simple, right?

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Legal Aspects of Business Continuation Planning

This article is the second in my series on what’s involved in planning for the worst. In the last one I gave an overview on who and what is involved in the process. This time I’ll lay out some of the legal work that may need to be done in order to put your plan into effect. The goal here is for your business to continue relatively smoothly if you die or are incapacitated. The most obvious benefit is that you or your beneficiaries will have a chance to receive the value of the business – which could be lost if you’re not there to run the business.

There are a bunch of great resources out there, largely from insurance companies and banks, about business continuation planning. Though it may seem like a lot to wrap your head around, the legal side is fairly simple. The first step is to identify what the essential parts of your business are. What’s the bare minimum that must be done in order to keep the doors open? Who’s capable of doing those things? What’s to become of your control of the business, and your share of the profits? Once you’ve figured that out, your business advisers can help you to get the paperwork done. That paperwork typically includes:

Continuation Plan

While not necessarily a legal document itself, it becomes enforceable when the directors or officers of the corporation resolve to adopt it. The continuation plan should include who is to assume what responsibilities, who is to oversee the transition, what is to happen with loans that are personally guaranteed, key contacts at customers, suppliers, service providers, advisers, and creditors, insurance policy information, where business records are kept, and any other information that someone taking over your role will need to know about the business.

The continuation plan should be kept in the company’s minute book.

Shareholders’ Agreement

A shareholders’ agreement is a contract between the owners of a company as to how they’ll run the corporation. It can also force those who become shareholders in the future – perhaps resulting from your death or incapacity – to do certain things in running the business. I’ve talked about why you should have one for your business in an earlier article. I’ll write another one soon about what should go in to one… but the continuation plan for the death or incapacity of key people should be part of the shareholders’ agreement. If you have one in place already, work with your lawyer to make sure it jives with the continuation plan. If you don’t have one in place, it’s a good idea to make one.

Insurance

Though it’s not a purely legal issue, insurance is an enabler for most continuation plans. It’s common for the company or your co-owners to take out insurance on you, and the other main players in the business. There are a number of different types of insurance, each with strengths and limitations. The goal is to ensure that there’s cash available to tide the business over and find someone to fill in for the person that’s been lost. Each business will be different, and a good insurance agent can give you the full slate of options, and help you to choose one that works for your company.

It’s important that your insurance agent and lawyer get in touch to discuss the policy you’ve selected so that the legal documents mesh with the policy. Your lawyer can also help you to understand what’s covered, and what’s not under the policy. Once you understand where the gaps are, you can come up with ways to minimize the risks that remain.

Corporate Documents

Picking someone to step into your shoes is one thing. Giving them the lawful authority to make decisions in your place can be another one altogether. You should consider appointing the chosen one as an officer of the corporation, and giving them conditional authority to speak and sign to bind the company in legal documents. They should know where the corporate records are kept, and be put in touch with key advisers including the corporation’s lawyer, accountant, and insurance agent.

When the continuation plan is made, you should ensure that your business books and records are up to date and complete, including the minute book, government filings, and accounting records. Your successor will have enough to deal with already, without having to deal with figuring out what state the company is in first. The corporate minute book should also include a resolution approving the contingency plan, which will prove useful in dealing with outside institutions – banks in particular.

Wills & Domestic Contracts

Not only should you have a will in place that deals with your interest in the company, but it should be in harmony with the continuation plan. If the corporation has decided that your control of the business should pass to one person, but your will passes all of your property to your spouse, there’s a huge potential for conflict. Many people use separate wills for their personal and business assets. Domestic contracts – while painful to negotiate – can be used to protect control of the corporation as something that’s not included in the marital assets in the event of separation or divorce.

Powers of Attorney

A Power of Attorney for property is a legal document that authorizes someone to act for you in making decisions in the event that you’re incapacitated. Banks and other creditors will want to see this, possibly along with the resolutions authorizing the contingency plan and granting signing authority before they’ll deal with someone they don’t know. These are usually made or updated at the same time as your will.

Employment Contracts

Many owner-operators work without a written contract of employment in place with their company. It’s generally understood that as an owner-operator, your responsibilities and risks are almost indefinite. It is a good idea to put an employment contract in place with yourself – a description of duties, salary, and benefits at a minimum. This will help to set expectations for what’s expected of and given to your replacement.

A current employee who steps up into your role will be taking on a great deal more responsibility, and assuming more personal risk in the form of director or officer liability than they had before. This type of change to the employer-employee relationship is something that should be down on paper to protect both of you. Salary, responsibilities, and expectations may all change in the new contract. It’s also good practice to give some form of protection, called indemnity, to those who run the company.

If there’s nobody in your company who could step up to run it, a manager may need to be hired from the outside. If you want to have any say over their role, and any limits on their authority, you’ll have to set those out in advance. Again, the starting point could be your employment contract.

Again, insurance can be used to cover some or all of the expense of hiring, training, and paying a new employee.

Practicalities

Training your possible successor is the most important piece of the puzzle. They may show the potential to run the business by having the right skill set, but will probably need time to be brought up to speed on how the business works. It’s never too early to start. The up-sides of having someone who’s capable of running the business are many – you may even be able to take a holiday for once!

It’s also important to be mindful of avoiding trying to run the business from beyond the grave. A properly trained and equipped successor will still have their own ideas, and should have the flexibility to see them to fruition.

Conclusion

When a thorough continuation plan is made, it’s a major step towards peace of mind for you and your dependents. If you’re laid up with an injury or illness and the business founders without you, you may not be able to pay for your own care. If you pass away, and the business you’ve worked so hard to build follows closely behind, your dependents may be left high and dry. If the business goes under, your employees and others who rely on it for their livelihood, could be in dire straits. While it’s an uncomfortable thing to talk about and plan for, it’s the responsible thing to do.

I’m happy to help you start the process, and I’ve got a good team of specialists who can guide you through the finer points of tax, employees, insurance, and financial planning should you want the help. The next article, on how to plan for your retirement, will be on its way soon!

Now, to counter all those gloomy thoughts I’ve put in your head, here are some very cute animals trying to look tough.

See you soon…

 

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Contingency Planning for Small Business

Owning your own business is kind of like giving birth to a needy child. It will fill your days with all manner of excitement, some good, some bad. There also comes a time when you need to start considering what happens to the child if and when you’re not around to take care of it anymore. What happens if you get sick? What if you kick the bucket? What if personal or family problems prevent you from running the business day to day? How the hell are you ever going to retire? None of those things, save perhaps retirement, are pleasant brunch conversation, but they must be had. They’re the first step in making contingency plans. Without such plans, the well-being of your family, employees, and company may be left in limbo – legally, financially, and business-wise. Contingency plans are certainly not decisions that should be made hastily, nor should they be made alone.

This is the first in a series of three articles I’ll be writing on the topic of contingency planning for your small business. This first one will be a general overview of who and what steps are involved in the process. The next two will touch on:

  1. Business continuation planning – if you become sick or incapacitated unexpectedly, and
  2. Business succession planning – how to retire and get the value you grew in the business out of the business.

Goals

Each business owner will have a different view of what they want out of “retired” life, but there are a few overarching goals that should be built into any succession plan:

  1. to make a smooth transition to a successor;
  2. to see the business in good hands going forward; and
  3. to have financial security in retirement or during illness or incapacity.

Timeline

When I say not to make the decision hastily, I mean it. There are a bunch of hard decisions that you’ll need to make. Your decisions will affect the people you care about the most – friends, family, employees, collaborators, customers/clients, suppliers, and so on.

For business continuation planning, give yourself a couple of months to put the plan together. This will give you time to have those tough discussions, get meaningful feedback and advice, gather the appropriate information, and get all the paperwork done. You want to ensure that the plan you’ve made is feasible, and will work even if the worst case scenario happens. You may also have to start training your staff to do what you do, which can take considerable time as well.

For business succession, allow several months to make the plan, and at least 3-5 years to ease the plan into effect. All of the same steps for business continuation planning apply here, but with a different end-game. So, if you’re a baby boomer who’s looking to make a slow, graceful exit from the business, the time to start planning is now…

Who’s involved?

It’s one thing to decide who you want to carry the flag for you, and another thing altogether for them to want to pick it up and run with it. There are two rounds of consultation to do – one with those affected by the plan, the other with the advisers that will help you piece it together.

In the first round of talks, you’re trying to figure out who’s willing and able to take over the business. At the end of the day, it’s up to you and your co-owners to choose, but I pity the fool who tries to pass their affairs on to someone who doesn’t care to take over, or doesn’t have the ability to run the business effectively. The folks you should talk to include:

  • Family members – particularly your spouse, children, and others who could be beneficiaries in your will
  • Business partners/co-owners/other shareholders
  • Friends with an interest in the business
  • Managers and senior employees
  • Major creditors

After those talks, you should have a pretty good idea of who’s willing to take over, what knowledge gaps need to be filled to get them ready to do your job should you not be able to. Then it’s up to you and your co-owners to choose who will take over, and when.

Once you’ve got a plan, it’s time to figure out how to put it into action. This is where your advisers earn their keep. You should talk to your:

  • Tax planning accountant**
  • Lawyer
  • Insurance agent
  • Banker, and
  • Major creditors

I put two of these bad boys – ** – next to the tax planning accountant for a reason. Many small businesses have an accountant who does their books and prepares tax returns each year. This accountant may be great, but they’re not necessarily a tax planning expert. A CA who focuses on tax planning can help you to get your money out of the business with minimal taxes. Your accountant will take the lead in planning how it’s to be done, your lawyer will do the grunt work to set up all of the structures, and your insurance agent will help you figure out how it’ll all get paid for.

The People Factor

As you well know by now, a successful business is only as good as the people who run it. If your business is doing well enough to prompt you to make contingency plans, then it’s also doing well enough for you to start grooming your employees to take more responsibility in it. When the employees are running a bigger piece of the company, you’re able to phase out gradually. This means training them to do what you do, allowing them to make mistakes and correct them, and developing their leadership skills. This learning curve may take years, so start doing it right away.

There’s a saying in the army that “no plan survives first contact with the enemy”, meaning that every plan looks great on paper, but things rarely ever go according to plan. It’s wise to build contingencies into your contingencies. Pick more than one worthy successor, or have more than one option. That way if your #1 choice jumps at a different opportunity, falls ill, or turns out not to have the leadership skills needed to take the business forward, you’re not up a fecal watercourse with no means of mechanical locomotion.

Conclusion

This was a very brief overview of the contingency planning process. In the next article, which you can find here, I’ll dive a little deeper into business continuation planning, and some of the legal stuff that’s involved in it.

If you’re looking for a more in-depth discussion of contingency planning, the Canadian Federation of Independent Business has an excellent guide up for free. The Government of Canada has published a quick online guide, and most banks and insurance companies have similar publications.

See you again soon!

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

The Basics of Contracts

One of the fundamental skills for a business owner is the ability to deal with contracts. Every day in Ontario, thousands of contracts are entered into for thousands of different reasons…. Quite often by people who don’t really understand what they’re agreeing to, and the consequences of not living up to their end of the bargain.

A contract is a binding agreement to exchange value between two or more entities, called “parties”. A contract can be either written or oral, so long as it has all of the essential parts discussed below. Oral agreements are more likely to end up in a he-said she-said if there’s ever a dispute. Most commercial contracts will be in writing so that there is a clear record of what was agreed upon. If there’s a dispute later on, the parties can look at the contract to see exactly what was meant. Certain types of contracts, such as those for the sale of land, are required by law to be in writing.

It’s good business practice to have your key agreements – with suppliers, distributors, franchisees, employees, contractors, and creditors – in writing. It’s also smart to let your lawyer do the writing, or at least review and edit what you wrote to make sure it’s sound. The more money or business risk that’s involved if the contract is broken, the more important it is to have a legally sound agreement from the start. The legal fees up front are far cheaper than a damages award. I’ve seen companies fail because they didn’t get legal help with their major contracts, and when push came to shove, their agreements weren’t binding, and didn’t say what they thought they did.

The essential parts of a contract

  1. Offer and acceptance. To form a contract, one party must make an offer to enter into a legal relationship, which at least one other party must accept. Both parties must willingly enter into the contract, and have the mental capacity to enter into and understand the terms of the agreement. The subject matter of the contract must also not violate any laws… so don’t come to me if you haven’t been paid for your work as an assassin…
  2. Consideration. Each party to the contract must gain value from it. In business this often boils down to the exchange of money for goods or services. The need for consideration is what separates bargains from gifts, which are when one party gives value and gets nothing in return. Gifts and contracts have different legal rules around them.
  3. Meeting of the minds. Both parties must intend to make a contract in the first place, and have a “reasonable” common understanding of what they’re actually agreeing to. This way, misunderstandings or vagueness can be cleared up by interpreting what a reasonable person in the situation would have thought they agreed to.

What does a contract look like?

You’ll usually find the following things in most written contracts:

  1. Identifying the parties to the agreement. Full legal names of who is entering into the contract.
  2. Definitions of important or frequently used terms. This keeps everyone on the same page about what’s being talked about in the contract, makes it shorter, and easier to read.
  3. Intentions or reasons for entering into the agreement. Though it’s usually not a binding part of the contract, it becomes a “guiding light” for anyone reading or interpreting the contract. It shows a meeting of the minds. If there’s a dispute, a judge will resolve vague terms, or unexpected problems with the parties’ intentions in mind.
  4. Representations and Warranties. A representation is a statement of an existing fact that makes the other party to want to contract with you – such as, that you actually own the thing you’re selling.A warranty is a guarantee that you’ll do certain things if things don’t work out as you’ve planned – such as, if the part you sell breaks in the first year, you’ll replace it at no charge.
  5. Terms of the deal. The responsibilities of each party, details about the money to be paid for a good or service, quality expected, delivery schedule, etc.
  6. General terms.  The legal framework of the contract itself – how to end it, what law governs it, dispute resolution, how to give written notice, indemnity, and so forth.
  7. Signatures of both of the parties. Evidence that both parties agree to what’s written in the contract.

What if the contract is broken?

A breach of a contract occurs when one of the parties fails to perform one or more of the responsibilities agreed to in the contract. In situations such as these, the other party will want to be compensated for the losses suffered.  Some remedies include:

  1. Damages. This is the usual solution to a broken contract – called a breach of contract. If the other party breaches a contract, you’re entitled to be put in the position you would have been in had lived up to their end of the deal. This usually means an award of expectation damages – monetary payment to make up for the losses directly resulting from the breach – or sometimes an order for the other party to do what they promised to – specific performance, discussed below.Consequential damages may also be awarded where your losses are not a direct result of the breach, but could have been reasonably foreseen by the party that broke the contract – such as business profits that you didn’t make because they didn’t send you the parts as promised.Punitive damages are additional compensation to punish the breaching party for being really really naughty. They’re rare, and only awarded in cases where a party, such as an insurance company, breaches a duty of “good faith” or acts unethically towards the other party.
  2. Reliance interest.  In cases where the expectation damages are difficult to calculate, the court may award the expenses spent in reliance on the contract going through as promised instead. You can’t have both, as then you’d have been compensated for both lost profits and expenses.
  3. Specific performance. A court order to do what was promised under the contract. It can occur where goods or services are unique, not readily available from other sources, or where money isn’t enough to compensate for your losses.
  4. Rescission. If representations (above) turn out to be false, and the whole contract can be set aside, and the parties will be returned to the position they were before they struck the deal. As in, “I never would’ve signed the contract if I’d known that…”

That’s the quick & dirty on the basics of contracts. I’m indebted to my student intern, Claudia Dzierbicki, for her work in putting together the guts of this article. I’ll get in the process of how to use a lawyer to help you draft and negotiate contracts in another article soon.

 

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Termination Pay – Firing Without Cause

Firing employees is among the least comfortable tasks that face business owners. Whether it’s a result of poor quality of work, conduct in the workplace, budget cuts, or restructuring, dismissing an employee is rarely a decision that’s made easily.

Employees can be let go for a reason – poor work quality, dishonesty, fraud, disciplinary issues – known as dismissal “for cause.” I’ll cover dismissal for cause in another article.

In Ontario, the Employment Standards Act, 2000, or ESA, sets the minimum standard for employee rights. It protects workers from unfair actions by employers. It is a “one size fits all” law, meaning that it imposes the same rules on small businesses as it does on Fortune 500 companies. On top of the complexities in the written law, the courts have fleshed out certain “common law” rules. Breaking those rules can mean paying big financial penalties for bad faith conduct, and a whole lot of time and heartache spent fighting lawsuits.  You should always consult with a lawyer before letting an employee go, just to make sure you’re not exposed to extra risk. You may pay more to the employee and your lawyer up front, but you can avoid a costly court case.

Dismissal Without Cause

If an employee is being let go without cause – due to the sale or merger of the business, budget cuts, or in a restructuring for example – the ESA requires employers to give a reasonable notice period. The employer may:

  • give written notice of dismissal and require the employee to work through the notice period while allowing them to search for new employment, or
  • terminate them immediately and pay their salary and benefits for the length of the notice period

Fixed Notice

Some employment contracts, particularly for management, will dictate a specific amount of notice that is required, such as:

The employer shall be entitled to end the employment relationship at any time, without cause, and at the employer’s discretion. Should the employer dismiss the employee without cause, the employee shall be entitled to payment of four months’ notice or pay in lieu of notice, including benefits.

If the employee is let go without cause, the employer must pay this amount without conditions such as requiring a release. A failure to pay, or an attempt to reduce the amount payable could be seen as bad faith, and could result in a big damages award against the employer.

Even if the employee mitigates their damages by finding another job right away, they’re still entitled to receive the full amount of damages.

ESA Minimum Notice

Many employment contracts state simply that:

The employer shall be entitled to end the employment relationship at any time, without cause, and at the employer’s discretion. Should the employer dismiss the employee without cause, the employee shall be entitled to the minimum notice or pay in lieu of notice, including benefits, required by the Employment Standards Act, 2000.

The general rule of thumb is one week of notice for every year of service is the starting point. Bear in mind, however, that this is only a minimum. Courts can award additional notice based on age, long-service, or their duties (managers or supervisors are often entitled to more notice) based on the common law, below. This is where your lawyer earns his keep – looking at the circumstances, and helping you to determine a reasonable notice period.

Bonuses and other discretionary benefits are tricky, and must be dealt with on a case-by-case basis.

Common Law Notice

If there is no notice provision in the contract, or a court finds that the ESA minimum would be unfair in the circumstances, the common law will apply. What a “reasonable” notice period is depends on the circumstances. Courts will decide the appropriate notice period based on a number of factors, including the employee’s age, length of service, and their role and responsibilities at the company. Again, this is where your lawyer earns his keep in helping you to determine what a reasonable amount of notice would be.

The above is a big picture view of what the law requires employers to consider when letting an employee go without cause. As usual, it’s for your information only, and no substitute for a discussion with a lawyer. I happen to know a guy…

Mike Hook
Intrepid Lawyer
@MikeHookLaw