Employment law considerations across the Canada and United States border

It is increasingly common for startups and other early-stage companies to engage talent on both sides of the Canada and United States border. Doing so may optimize the resources available to a burgeoning business, but it also presents difficulties if handled haphazardly. In this article, we touch on a few critical employment law considerations that companies should know when operating a business in Canada (other than in Québec) and the United States.

Governing law

A common pitfall for businesses that hire employees across borders involves applying the wrong set of laws to the employment relationship.

In the U.S., 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are governed by the relevant laws of the state in which the employee resides and/or performs work, to the extent not superseded by federal law.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, the federal Employee Retirement Income Security Act of 1974 generally supersedes conflicting state laws. Relevant state laws include those pertaining to wage and hour, classification, leave, termination provisions, tax, workers’ compensation, anti-discrimination, insurance and many others.

In Canada, most employment relationships are governed by the relevant laws of the province or territory in which the employee resides and performs work. Relevant provincial or territorial laws include those pertaining to employment standards (including wage and hour, leave and termination provisions), labour relations, pension benefits, workers’ compensation, health and safety, pay equity, human rights (including anti-discrimination) and many others.

Non-compliance with applicable employment laws could expose an employer to penalties, fines, employee claims and other undesirable outcomes. Accordingly, employers must adjust and periodically review employment contracts, practices and policies to ensure compliance with applicable laws.

Termination of employment

Terminations of employment are an unavoidable part of any venture. They can involve unforeseen costs if not approached with care and an understanding of applicable laws. Canada and the United States differ in their respective treatments of employee terminations.

In the United States, most employees are typically “at-will,” meaning either side can terminate the employment relationship at any time, for any reason or no reason, with or without cause, with or without notice. Executives and other senior-level employees, on the other hand, are often subject to an employment contract, which serves as an exception to the “at-will” arrangement. This contract provides detailed terms and conditions on termination of employment, definitions of termination by the employer with and without “cause” and resignation by the executive with or without “good reason,” notice requirements (which usually differ based on the reason for leaving), entitlements to severance and obligations to sign a release of claims. Separation and severance agreements in the United States are subject to specific and often complex state and federal laws (e.g., United States Internal Revenue Code Section 409A), including special laws for termination of employees over age 40 and termination of multiple employees.

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 termination or pay in lieu of that notice by way of provincial minimum standards employment legislation, common law and/or contract. Provincial minimum standards employment legislation establishes the minimum termination notice or pay in lieu that an employer must provide to an employee. Such legislation may also require mass termination pay, severance pay and/or benefits to continue beyond the termination date. Also, unless the employee has clearly agreed otherwise in their employment contract, employers who terminate an employee on a without cause basis will generally be required to provide common law reasonable notice or pay in lieu thereof. Common law reasonable notice or pay in lieu obligations are often challenging to precisely compute, typically leading to disputes and litigation between employers and employees, and can be a significant liability on employers (being up to and sometimes exceeding 24 months). Common law entitlements may result if the termination provisions of an employment contract contain ambiguity, do not clearly carve out common law entitlements or are not compliant with the applicable requirements of provincial minimum standards employment legislation.

Most employees in Canada are provided with minimum standards termination entitlements, as in the United States. However, executives and other senior-level employees in Canada are often provided with excess contractual termination entitlements in exchange for a release of claims at the time of termination. In all cases, however, we generally aim to exclude common law entitlements.

Accordingly, companies with employees in Canada and/or the United States must carefully draft their termination provisions. They must ensure compliance with applicable laws, the employee’s entitlements are appropriate and their employment contracts provide the company with adequate protections.

Classification

Exempt and non-exempt employees

In the United States, employees are generally classified for purposes of overtime pay eligibility as either “exempt” or “non-exempt.” Typically, exempt employees hold administrative, professional, outside sales, executive or other statutorily recognized positions that involve high-level decision-making authority or job responsibilities removing them from overtime pay eligibility. Exempt employees are salaried and must earn above a certain salary threshold to remain exempt. In contrast, non-exempt employees are usually engaged in lower-skilled jobs, paid on an hourly basis and eligible for overtime pay when they work more than 40 hours in a workweek (and, in some state jurisdictions, in excess of eight hours in any workday). 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.” However, a similar exercise is applied on a case-by-case basis for the purpose of determining eligibility to certain minimum standards under applicable employment legislation. For example, employment standards legislation typically excludes managerial employees and professional employees (such as accountants, lawyers or engineers) from the requirement to provide overtime pay and to comply with hours of work limitations. These exemptions vary by province, as employees in different 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. Whether an individual has been properly classified as an independent contractor rather than as an employee, and vice versa, is often contested in courts and by government agencies in both Canada and the United States.

Briefly, employees in the United States are subject to the Fair Labor Standards Act and other employment law protections while independent contractors are not. Employers are responsible for withholding employment taxes for employees, paying the employer’s share of Social Security and Medicare taxes, and contributing to state workers’ compensation and unemployment insurance funds for employees but not for independent contractors. As above, non-complying employers may be 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., back pay for unpaid vacation and overtime pay, if eligible). They are also entitled to 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 classified. Further, Canada has a third category called “dependent contractors,” who typically are not subject to protections under provincial minimum standards employment legislation but are entitled to common law reasonable notice.

Accordingly, employers who retain independent contractors in Canada and/or the United States should be careful when classifying their service providers as independent contractors. They should also ensure their contracts are properly drafted to mitigate, to the extent possible, any unforeseen or unwanted liability.

Conclusion

Crafting unified contracts, policies and procedures for employees and contractors based in Canada and the United States is challenging. Mintz can assist you in complying with applicable laws in both jurisdictions. Please contact our 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.

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