Although written employment contracts are not mandatory, over the past couple of years, more and more employers are realizing the value of having a written employment contract to govern the terms of employment of their employees. Without an enforceable written contract, terminating the employment of any employee can be extremely expensive for employers.
Much of the employment law litigation that has taken place in our courts over the past few years has revolved around termination clauses in employment contracts. In 2020, a landmark case from the Ontario Court of Appeal, Waksdale v. Swegon North America Inc., invalidated the termination clauses in tens of thousands of employment contracts across Ontario. This left many employers seeking to update their employment contracts, and the termination clauses therein, to minimize to the greatest extent possible their liabilities upon the termination of their employees.
Many employers ask “Can’t I just get my employees to sign a new contract?” Legally speaking, the answer is no. If all an employee does is sign that newly updated contract without anything more, that contract will not be enforceable or worth the paper it is written on. That is because for an employment contract to be enforceable there must have been fresh consideration given to the employee in exchange for signing it.
What is Consideration?
Consideration is something of value or a benefit that is received in exchange for signing a contract. Both parties must receive some benefit from the contract, and if they don’t that contract is not enforceable.
When new employees are hired, consideration is a non-issue. That is because the employer receives the benefits of the work that is to be provided by that employee whereas the employee receives the benefit of the new job and the compensation paid in exchange for the work performed.
The real issue is for current employees who are already working for an employer and whom the employer wants to sign a new updated employment contract. In this scenario, the employer gets consideration in the form of the new enforceable terms of the contract that the employee will be subject to. But since the employee is already working in his position, the courts have repeatedly found that the employee’s continued employment alone, without more, does not constitute consideration (see for example Techform Products Ltd. v. Wolda). That is because the employee has not received any new benefit in exchange for signing the new contract.
Types of Consideration
The consideration that an employer provides an employee in exchange for signing a new contract can take almost any form as long as the employee receives some tangible benefit.
However, to be enforceable, the consideration must in fact come from the employer. As the Court found in Braiden v. La-Z-Boy Canada Limited, arranging the employment relationship in a tax advantageous manner for the employee, such that they receive a tax benefit from the Canada Revenue Agency, does not meet the test for consideration as the employee’s tax benefit does not come from the employer but rather from the government.
Courts will not engage in an analysis over whether the amount of consideration is sufficient. As one judge recently said in Lancia v. Park Dentistry “it is trite law that courts will not inquire into the adequacy of consideration – a “peppercorn” will do.” So, there is no minimum amount of consideration that an employer must pay for a new contract to be enforceable as long as something of value has been provided to and stays with the employee. It cannot be a zero-sum exchange, along the lines of “I will give you $10, and then in return you give me $10”.
With the above principles in mind, what can be used as valid consideration can vary significantly. By far the most common forms of consideration are those that are financial in nature such as a salary increase or a signing bonus. But consideration can also take many other forms such as gift cards, a promotion, greater benefits, the shortening of working hours (without a reduction in compensation), providing additional vacation time or even permitting an employee to work remotely (but only if they did not previously enjoy that right).
Practical Tips for Employers
If done wrong, the process of having existing employees sign new contracts with modified terms can result not only in the new contracts being unenforceable (which can lead to wasted time and money now and significant future expenses if you need to terminate that employee in the future) but can also lead to a potential claim of constructive dismissal, resulting in significant expenses immediately.
Here are some practical tips for employers who are seeking to have their current employees sign updated contracts:
- Have your employment contracts drafted and/or reviewed by an employment lawyer to ensure that the clauses therein are valid and enforceable (otherwise this whole process may be for nothing);
- Prepare a cover letter or cover email that clearly states what fresh consideration is being provided to the employee in exchange for signing the new updated contract;
- Provide the employees with sufficient time to review those contracts and seek legal advice if they so choose. Generally, you want to provide at least 72 hours before requiring the signed contracts to be returned;
- Do not force employees to sign the new contract under duress. You cannot say to them that if they fail to sign the contract their employment will be terminated. If you do so, their signed contracts will be legally unenforceable (see for example Hobbs v. TDI Canada Ltd.;
- Only provide the consideration to the employee after the contract has been signed and returned but ensure that the consideration is in fact provided once the new contract has been signed. If the consideration is paid before the contract is signed or if it is paid to all employees regardless of whether or not the contract is signed, the signed contract will be deemed to be unenforceable, because the benefit will be found not to have been in exchange for their having signed the contract; and
- The consideration must be something new and cannot be something that the employee was already entitled to receive. For example, if an employee receives an annual Christmas bonus every year, an employer cannot then say that it will only provide that Christmas bonus this year if the employee signs the new updated contract. To be valid that consideration must be something new that the employee will not otherwise receive if they do not sign the contract.
As the above steps demonstrate, employers must be extremely careful with the manner in which they implement new employment contracts for their employees. If you are an employer that plans to update the employment contracts of your employees to ensure that they comply with the current legal requirements, contact an employment lawyer at Soloway Wright LLP today and we will assist you with ensuring that all the proper steps are followed so that your employees are subject to valid and enforceable employment contracts.
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DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. The information contained herein summarizes only certain aspects of the subject matter and is not a comprehensive review of applicable law. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.