An employer with operations in multiple jurisdictions is still required to meet local employment law standards, regardless of where its head office is located. There are a number of significant employment law differences between Canada and the United States and we share 10 key differences below.
Termination of employment
Subject to certain conditions and exclusions, Canadian employers are required under employment standards legislation to give employees at least statutory minimum notice of termination or pay in lieu (and, in some cases, severance pay), when they are dismissed “without cause.” They may also be required to give lengthier notice or pay in lieu under common law, civil law or the employee's employment agreement, as the case may be.
In the United States, employment is generally “at will” and employer notice of termination is generally required only by contract or company policy.
Severance plans or policies are uncommon in Canada, at least in part because they generally cannot be relied upon to override an employee's legal rights to notice of termination. Further, in the absence of a collective agreement, notice and severance entitlements are generally determined on an individual basis, not on the basis of a formula such as a severance plan or policy may contain. Therefore, there is usually little point in using a document such as a severance plan in Canada.
Severance policies are more common in the United States, and benefits thereunder are frequently tied to seniority of title and/or length of service. It is beneficial for a United States em ployer to require the severed employee to execute a general release of all employment-related claims as a prerequisite to receiving severance payments. The employer may amend its severance policy from time to time. In addition, many U.S. employers do not maintain a formal, written severance policy, but rather make severance determinations on a one-off basis depending on the value of a release of claims, or establish severance policies for limited windows of time in connection with layoffs or reorganizations.
Wrongful dismissal litigation in Canada is well-developed and tends to result in more predictable damage awards. As a result, it may proceed more quickly to resolution than in the United States.
In the United States, employment litigation against employers may include claims of discrimination under state or federal law. While wrongful termination litigation in the United States has gained a reputation for unpredictable damage awards resulting from jury trials, the vast majority of cases settle out of court.
Continued employment does not generally constitute valid consideration in Canada. Accordingly, for example, if restrictive covenants are added to a Canadian employee's contract (e.g., a post-employment non-compete), fresh consideration, such as a pay raise or a grant of long-term incentive compensation, should be provided. Further, material adverse changes to the terms and conditions of a Canadian employee's employment can only be made on reasonable or contractual notice.
In the United States, state law governs whether continued employment is sufficient consideration for post-employment non-competition agreements. However, in many states, continuation of a preexisting employment relationship, without more, is not deemed to be sufficient consideration for the imposition of a new non-competition agreement. Without a written agreement or statutory rights (e.g., minimum wages, overtime pay), employment terms are generally subject to modification at any time and without prior notice in the United States.
In the employment context, non-competition covenants are difficult to enforce in Canada and are governed by the common law. Canadian courts will generally only enforce such covenants in respect of fiduciaries, such as high ranking employees (e.g., C-level executives), and where the covenants are reasonable in time, geographic scope and with respect to the protected business activities. However, Canadian courts will generally be more receptive to enforcing non-solicitation covenants for employees, if they are reasonably drafted.
In the United States, the enforceability of restrictive covenants is dependent on state law. Courts in most states will generally enforce non-competition agreements that are reasonable in time and geographic scope, and with restrictions no greater than necessary to protect the employer's legitimate business interests. However, some states deem non-competition covenants to be unenforceable in the employment context for public policy reasons. There is increasing scrutiny in several U.S. states of non-competition agreements for rank-and-file employees without particularized skills.
Canadian courts do not “blue pencil” or modify restrictive covenants, so a covenant that is too broad will be struck out completely. In the United States, some states will permit the modification of the terms of a restrictive covenant, particularly if the covenant contains a blue pencil clause. Other states will deem an overly broad restrictive covenant to be unenforceable in its entirety.
Compensation disclosure for public companies
The key difference between Canada and the U.S. is that a non-binding shareholder vote on compensation (say-on-pay), as well as a vote on the frequency of say-on-pay, is mandatory for U.S. issuers, while in Canada, say-on-pay is still voluntary. However, the prevalence of say-on-pay is increasing among large public issuers in Canada.
In both Canada and the U.S., option holders are generally taxed upon exercise of stock options on the difference between the fair market value of the stock on the date of exercise and the exercise price. The key difference centres on who receives tax advantages.
In Canada, subject to satisfying certain requirements, the option holder receives a tax advantage as the spread is taxed effectively at capital gains rates, while the company is not entitled to a tax deduction in respect of the issuance of shares when an option is exercised.
In the U.S., options are typically designed either as incentive stock options (ISOs), with the potential for preferential tax treatment, or as nonqualified stock options (NQSOs) subject to ordinary income taxation. ISOs are not subject to basic ordinary income taxation upon vesting or exercise, and the employer cannot take a corresponding compensation deduction.
Upon exercise of an NQSO, the optionholder recognizes ordinary income in an amount equal to the option spread, and the employer is generally entitled to a corresponding tax deduction.
Although ISOs offer employees a more favorable tax result than do NQSOs, ISOs have fallen out of favor in many industries in the U.S. due to statutory constraints and administrative complication. As a result, NQSOs are more commonly granted in the U.S. in the corporate context. However, ISOs still remain prevalent in the emerging company and life sciences industry in the U.S.
Grants of restricted stock to Canadian employees are taxed at the time of grant. Grants of restricted stock to U.S. employees are taxed at ordinary income rates at the time the restrictions lapse, unless the employees voluntarily elect to recognize income with respect to the stock within 30 days following grant. Thereafter, the shares are eligible for short- or long-term capital gains treatment. For a Canadian employee to obtain tax treatment comparable to U.S. tax treatment of restricted stock grants, Canadian companies instead grant restricted share units, which are notional units with value equivalent to the company's shares. However, there are deferral or deductibility limitations on these types of vehicles, depending on the structure chosen and
whether the restricted share units are settled in treasury shares, cash, or shares purchased on the open market. Share units may also be granted in the United States, and are a relatively common form of equity incentive particularly in the public company context.
Changes to post-retirement welfare benefits
In Canada, it is difficult to reduce post-retirement welfare benefits and almost impossible to reduce these benefits for existing retirees. In the United States, there is more flexibility in making changes to these benefits, provided the company has reserved the right to amend or terminate such benefits from the outset. Where such benefits are provided pursuant to the terms of a collective bargaining agreement, union consent may be required both in Canada and in the U.S.
In both Canada and the United States, discrimination in employment is prohibited on specified grounds, such as colour, gender, ethnic origin, religion (creed), age and in some states, sexual orientation. The most significant differences between the two regimes relate to discrimination based on disability.
In both jurisdictions, disability-based discrimination is prohibited by legislation (in the United States under the Americans with Disabilities Act and in Canada under human rights codes and the Canadian Charter of Rights and Freedoms), and employers have a duty to accommodate the disability. In Canada, the duty to accommodate disability obligates an employer to accommodate an employee's disability to the point of undue hardship to the employer (which is much higher than a reasonableness standard), and alcoholism and drug addiction are recognized as disabilities at law that require accommodation. Workplace drug and alcohol testing in Canada are also generally restricted.
In the United States, employers must provide only reasonable accommodations to a disabled employee, unless doing so would cause undue hardship to the employer, some state laws expand the definitions of covered disabilities and reasonable accommodation. Alcoholism and drug addiction (in recovery) are recognized as disabilities. However, employment drug and alcohol testing is much more common in the United States and is generally legally permissible, although the requirements vary by state. Some states authorize random testing and other limit tests to circumstances involving “reasonable suspicion” or “probable cause.”
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.