Replacing a Contractor’s Key Employees During a Project and the Penalties for Doing So: How to Reduce the Risks?

Some public-sector entities that award construction contracts are now imposing penalties of up to $100,000 in cases where key employees designated in a contractor’s bid (e.g. project manager, superintendent) are replaced without authorization while the project is ongoing. Being bound by such an obligation can have serious, even fatal, consequences for contractors in a highly competitive market where labour is increasingly mobile and projects can go on for long periods of time.

Apart from obtaining the public body’s authorization before proceeding with any such personnel change (by following the procedure provided for in the contract in that regard) or having such clauses declared abusive in certain circumstances (force majeure, absence of any impact, etc.), is there anything contactors can do to reduce the risk of these sizeable penalties, such as inserting in their employment agreements clauses to protect themselves from their effects?

The answer to that question is relatively straightforward, at least in theory, as employers and employees are free to negotiate the terms of the contract between them. In contexts such as this, employees can choose to either accept or reject the terms proposed by the employer.

Thus, the employer could  impose a penalty in the event the employment contract is terminated by the employee before a specific project is completed, or include in the contract a non-compete clause with sufficiently strict conditions, short of being abusive, to discourage key employees from prematurely terminating their employment agreement.

In reality however a contractor submitting a bid pursuant to a call for tenders already has in its employ most if not all of the key employees it attends to use on the project. In such circumstances it may be difficult to get those individuals to agree to new conditions in their employment contracts.

Moreover, as opposed to new employees recruited by the contractor, the courts have taken the view that unilaterally imposing a penalty clause or a non-compete clause during the term of an existing contract may be tantamount to unjust dismissal¹. In other words, an employee who refuses to accept the changes sought to be imposed by the employer and decides to resign on that account would have a viable legal recourse and could be awarded a substantial indemnity or even, in certain circumstances, the right to have his or her job back. Furthermore, the employer could not impose disciplinary sanctions on or dismiss without prior notice an employee who, during the term of the employment contract, refuses to agree to a non-compete clause or even a penal clause in the event of premature termination of the contract².

One of the possible solutions for avoiding this type of problem is to offer reasonable financial consideration for signing this sort of clause. The amount of that compensation could be accounted for in the contractor’s submission costs: while slightly increasing the price of its bid, the impact would be less onerous than the potential imposition of one or more $100,000 penalties.

Consequently, the aggregate salary increases of key employees as a result of adding non-compete or penalty clauses to their employment contracts or, absent those, the risk of significant penalties being imposed by the project owner, should be taken into consideration by contractors in preparing their bids and, more specifically, in calculating the submission costs identified in the offer of services.