If You're a Canadian Employer You Should Seriously Consider Using Employment Contracts
Next month I'll be conducting a full day seminar at the Human Resources Professional Association of Ontario on Employment Contracts: Tips, Traps and Techniques. I've been reading a lot of recent cases and reviewing some of my own writing on the importance of employment contracts under Canadian employment law.
Unlike in many US States there's no concept of so-called employment at-will in Canada. As such, in the absence of a legally enforceable written contract of employment, the employment relationship can only be terminated for just cause or, in the absence of just cause, upon reasonable notice or pay in lieu of such notice. This "presumption" of reasonable notice can be displaced by a written contract of employment.
Often times, employers have written contracts of employment and terminate based on their terms. The pay the amount agreed to in the contracts and wish him/her well in his/her future endeavours. The employer gets a letter from the employees' lawyer and sends it over to their own.
As we're wont to do, we starting asking questions.
Here's the problem. After a little questioning and a review of the contract, it turns out that the contract is not enforceable. The employer, as they are wont to do, asks you to explain. Here are the two most common ways that the contract will be found to be unenforceable (there are others).
No Consideration
As with any contract, an employment contract requires three things:
- An offer
- Acceptance
- Consideration
The offer has to be clear and unambiguous and it must be accepted voluntarily and without duress.
Consideration is "something that is done or promised in return for a contractual promise" (for more, check out this). In the case of a new employment relationship, the contract should be given to the employee well in advance of the start date, he or she should be given an opportunity to review it and seek advice or clarification, and it should be accepted before the employee steps foot through the door to start working.
There's a leading Ontario case on this called Francis v. CIBC and it deals with the issue of consideration and is a must read.
In the case of a variation of the employment contract (i.e. the employee is already with the organization, and the employer wants to implement a "change" to the terms such as a termination provision or restrictive covenant), there must be "fresh" or "new" consideration that the employer is not otherwise contractually or otherwise required to provide. It is a gratuitous payment or benefit. Have a read of Techform Products Limited v. Wolda when dealing with consideration in the context of, for example, restrictive covenants.
The Termination Clause is Not Enforceable
The displacement of the common law presumption of reasonable notice only takes place where the contractual termination provision is legally enforceable. The most common watch out here is to ensure that the termination provision complies with the minimum standards legislation (such as the Ontario Employment Standards Act, 2000). If it doesn't, the court will find that the common law presumption is not rebutted and the employer is on the hook for common law damages for reasonable notice (which can be significant - 24 months or more in "exceptional circumstances" - Lowndes v. Summit Ford Sales Limited.)
The leading case comes from the Supreme Court of Canada - Machtinger v. HOJ Industries Ltd. but there's more recent cases including this one.
I'm a strong advocate of the use of employment contracts. That said, each employer should decide, at a philosophical level, whether it wishes to enter into employment contracts with its employees. It should consider the costly downsides of not doing so in making this decision.
I'm also a big believer that anything worth doing is worth doing right - there's no point in going to the trouble of negotiating and entering into a nice looking contract that, in the end, is literally not worth the paper it's written on.
