Hiring Across the 49th Parallel: Traps for the Unwary for Cross-Border US-Canada Hires

The United States and Canada have long been great trade partners, and not only with respect to hockey players.  As commerce in general and employee mobility in particular increases, employers with operations in the United States and Canada may consider a “one-size-fits all” approach to employment, benefits and compensation arrangements. However, despite similarities in nomenclature and the Anglo-influenced common law system (excluding Québec and Louisiana), employers should take heed of possible discrepancies across the two countries’ employment landscapes.  In this Part I of our series on cross-border hiring, we discuss governing law, termination, and classification issues.

Governing Law

A common pitfall for employers who hire employees across borders is to apply the wrong set of rules to the employment relationship.  An employer may hope to apply the already familiar employment laws of its home jurisdiction to a new hire who is domiciled in an unfamiliar jurisdiction, but the local rules of that new hire’s physical location may prevail instead.  This can result in jurisdictional non-compliance, potentially exposing the employer to penalties, fines, employee claims, and other undesirable outcomes.

In the US, most employment relationships are governed by the relevant laws of the state in which the employee resides and/or performs work, to the extent not superseded by federal law (for example, in a conflict between a state law and ERISA, ERISA expressly supersedes state law, except in certain limited circumstances).  Relevant state laws include wage and hour, classification, leave, termination provisions, tax, workers’ compensation, anti-discrimination, insurance and many others.  While a state-by-state survey is beyond the scope of this article, it is important to note that Delaware is often the default law for many US business relationships.

In Canada, most employment relationships are governed by the relevant laws of the province (or territory) in which the employee resides and performs work.  These provincial laws include employment standards, labour relations, pension benefits, injured workers’ compensation, health and safety, pay equity, human rights, and other related legislation.  For businesses in Canada that are federally regulated, which includes banks, railways, airlines, telecommunications companies and others, federal employment legislation will govern the relationship instead of provincial laws regardless of where in Canada the employee is located.

Accordingly, it is essential that employers correctly identify the applicable set of employment and other relevant laws and adjust as needed their employment contracts, practices, and policies to be compatible with those laws.

Termination of Employment

For better or worse, the employment relationship must end at some point.  Terminations of employment are usually a little more complicated than a handshake and a pat on the back, and the US and Canada may differ in their respective treatments of terminations.

In the US, most employees are “at-will” – either side can terminate the employment relationship at any time, for any reason or no reason, with or without cause, with or without notice (although it may be customary for some companies or employees to provide notice, even absent a specific policy).  Despite the widespread use of at-will employment, executives are often subject to an employment agreement which serves as an exception to the “at-will” arrangement and provides detailed terms and conditions related to term of employment, definitions of “cause” and “good reason,” notice requirements (which usually differ based on the reason for leaving) and entitlements to severance.

Separation/severance agreements in the US are subject to specific and often complex state and federal (e.g., Code Section 409) laws, including special laws for termination of employees over age 40 and termination of multiple employees.  Severance agreements may contain a release of claims and restrictive covenants – confidentiality, non-compete, non-solicit of employees and/or business relationships and non-disparage.  A departing employee must be provided with “consideration” in exchange for signing a release of claims, and the contours of “consideration” vary widely between states.  Similarly, the legality and enforceability of restrictive covenants vary widely between states, with a general rule of thumb being that a restrictive covenant must be reasonable in terms of duration and geographic scope.  There is, however, a growing trend to ban non-competes entirely or nearly entirely, in line with California’s current law. 

There is no “at-will” employment concept in Canada.  An employee in Canada whose employment is terminated without cause is generally entitled to advance notice of the termination or pay in lieu of that notice. Provincial and federal employment minimum standards legislation establishes the minimum termination notice or pay in lieu an employer must provide to an employee and, unless the employee has clearly agreed otherwise in their employment contract, employers must also provide common law reasonable notice to the employee to the extent that notice exceeds the minimum amount set out in the applicable legislation.  Provided legislative minimum standards are respected, employers and employees may agree to a specific notice of termination or pay in lieu entitlement in the applicable employment contract and exclude common law reasonable notice entitlements.  Doing so is a regular practice for employers to control their common law reasonable notice obligations, which can be difficult to accurately compute and are oftentimes significant, being up to (and sometimes exceeding) 24 months of notice or pay in lieu thereof.  In addition to legislative and common law notice or pay in lieu, some jurisdictions in Canada also require the payment of severance pay and, depending on the circumstances surrounding the termination, mass termination notice or pay in lieu, and some require benefits to continue beyond the termination date.  As such, termination of employment provisions in Canadian employment contracts are heavily scrutinized by employee-side counsel and Canadian courts. They require careful drafting to be enforceable and to limit unforeseen or unwanted employer termination liability.  Employment contracts for employees in Canada should therefore be specifically catered to the applicable jurisdiction and regularly updated based on case law and legislative developments.  Notably, fresh consideration, such as a raise in salary or an off-cycle bonus payment, is generally necessary to give effect to any revised contract with an existing employee.  You can find further information on termination provisions in Canadian employment contracts here.

Classification

Exempt and Non-Exempt Employees

In the United States, employees are generally classified for purposes of the Fair Labor Standards Act (“FLSA”) as “exempt” or “non-exempt.”  Typically, exempt employees hold administrative, professional or executive or other statutorily recognized positions that often involve certain decision-making authority or job responsibilities that remove them from overtime eligibility.  Exempt employees are almost always salaried and must earn above a certain salary threshold. Non-exempt employees, by contrast, are usually engaged in lower-skilled jobs and paid on an hourly basis and are eligible for overtime when they work more than 40 hours in a workweek.  The consequences of misclassification can be dire, as non-complying employers may be subject to liquidated damages, fines and penalties.

Employees in Canada are not generally classified as “exempt” or “non-exempt,” but a similar exercise is applied on a case-by-case basis for the purpose of determining eligibility to certain minimum legislative standards.  For example, employment standards legislation typically excludes managerial employees and professional employees (such as accountants or engineers) from the requirement to provide overtime pay and to comply with hours of work limitations.  These exemptions vary by province such that employees in separate provinces may be required to be treated differently despite having similar roles.  Employers who incorrectly treat an employee as exempt from a minimum legislative standard may be subject to fines, penalties, and claims from the employee for, among other things, the minimum entitlements they should have been afforded had they been correctly classified.

Contractors

A similar issue arises with respect to employees and independent contractors.  Independent contractor status is often disfavored, and the issue is hotly contested in courts and government agencies (Department of Labor, National Labor Relations Board, Federal Trade Commission).  Briefly, employees are subject to the FLSA’s and certain other employment law protections while independent contractors are not.  Employers are responsible for employment taxes for employees but not for independent contractors.  As above, non-complying employers may by subject to fines, penalties and/or payments (and deductions and withholdings) that should have been made had the individual been correctly classified as an employee.

A similar regime applies in Canada, with the added concern that independent contractors who are improperly classified (i.e., should have been classified as employees) will also be entitled to minimum employment standards protections, including retroactively (e.g., backpay for unpaid vacation and overtime pay, if eligible), and common law reasonable notice upon the termination of their engagement on a without cause basis.  Employers may also be liable for mandatory deductions and remittances that should have been made had the contractor been properly treated as an employee instead. Further, Canada has a third category of contractors called “dependent contractors,” who typically are not subject to protections under employment standards legislation but are entitled to common law reasonable notice.  Accordingly, businesses in Canada should be careful when classifying a service provider as an employee, independent contractor, or dependent contractor and ensure that their contracts are properly drafted so to mitigate, to the extent possible, any unforeseen or unwanted liability.  Courts and regulatory bodies will generally look at the entirety of the relationship in making a determination regarding classification, notwithstanding if the explicit language of the contract contemplates a particular classification.

Conclusion

As described above, crafting unified policies and procedures for US and Canadian employees is challenging, if not impossible.  Mintz can assist you in complying with employment laws in both the United States and Canada.  Please contact Mintz’s Employment Practice if you: are considering hiring someone across the border, have questions or concerns about your existing cross-border workforce, and/or are working for (or considering working for) a cross-border employer.

Stay tuned for Part II of Mintz’ series on cross-border hiring, in which we will discuss short-term and long-term incentive plans.

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