Posts Tagged ‘employment contracts’

Shafik Bhalloo
Tuesday, September 17th, 2013    Posted by Shafik Bhalloo (posts)
Shafik Bhalloo
Shafik Bhalloo has been a partner of Kornfeld LLP since 2000. His practice is focused on labour and employment law, and on commercial and civil litigation. He is also an Adjudicator on the Employment Standards Tribunal and an Adjunct Professor in the Faculty of Business Administration at Simon Fraser University.

Employment Contracts and Fresh Consideration

By Shafik Bhalloo, Sasha Ramnarine, Devin Lucas

 

An essential element in the formation and enforceability of any contract is consideration. Each party receives a benefit from the contract and may suffer corresponding detriment. This benefit and detriment are referred to as consideration. Without it, a contract is not binding or enforceable.

Employment contracts are no exception to this rule. Without consideration, any employment contract that is formed between an employer and employee is not enforceable.  In today’s economy, many employers are involved in reorganizing or downsizing. This often leads to the employer unilaterally changing the terms of employment of an existing contract by adding significant duties or reducing compensation or other benefits. An employer may ask an employee to sign a new contract with introduce more restrictive terms which have not previously been discussed with the employee. The employee often agrees to these changes without much question. The issue that arises in such situations is whether unilateral changes to a contract of employment made by the employer after the employee has started employment are enforceable if there is no new consideration provided to the employee.

Courts in Canada have held that fresh consideration must be given by the employer to the employee in exchange for modified terms to an existing employment contract.  The following cases demonstrate this principle.

In Singh v. Empire Life Insurance Co.[1], the primary issue before the British Columbia Court of Appeal was whether or not the terms of an Employment Agreement were enforceable.  Harry Singh commenced work on September 1, 1998 as the Regional Manager for the Vancouver Bayshore.  At Mr. Singh’s request, a representative of the employer provided a letter of comfort dated September 1 to Mr. Singh.  The letter stated:

This is a Letter of Comfort stating that Harry Singh is offered the position of Regional Manager of Empire Financial Group with a total compensation package of $170,000 made up a number of components.  Effective September 1, 1998.  A formal letter and contract will follow.

Subsequently, Mr. Singh received another letter dated the same day under the heading “Re Confirmation of Offer – Regional Manager, Vancouver Bayshore”.  This letter confirmed specific details of Mr. Singh’s employment with respect to his salary and the fact that the initial term would be for 2 years.  Mr. Singh continued in that employment for five months before the Employment Agreement was executed.  This agreement contained a termination clause stating that “the termination will be effective at the end of the appropriate period of notice according to applicable provincial legislation”.  In November 2012, Mr. Singh’s position became redundant and he was let go.  Mr. Singh then commenced an action against the employer claiming damages for the remaining ten months in the two year term.  The employer argued that the contract was terminable on two weeks’ notice pursuant to the Employment Standards Act.

 

The Court of Appeal upheld the lower court’s finding that the employer could not rely on the provisions of the subsequently signed agreement, which were less favourable to Mr. Singh than the terms of the original contract.  In so holding, the Court affirmed the leading British Columbia Court of Appeal decision of Watson v. Moore Corporation Ltd.[2]

 

In Watson, McEachern C.J.B.C., writing for the majority, found that unless the employer had a clear intention of terminating the employee’s employment prior to the employee executing the contract amendment, the mere forbearance from termination at this juncture was not adequate consideration for the amendment.

The Court of Appeal in Singh ultimately found that when the Employment Agreement was signed there was no benefit passing to Mr. Singh that he would not otherwise be entitled to.  As such, the contract was held to be unenforceable.

In the Ontario Court of Appeal case of Hobbs v TDI Canada Ltd.[3], the Plaintiff, Hobbs, was an experienced advertising salesperson who took a job with TDI Canada Ltd. (“TDI”). Prior to his start date, there was an oral agreement between Hobbs and TDI on the commission rates Hobbs was to receive. Shortly after Hobbs commenced his employment, he was given a non-negotiable Solicitor’s Agreement.  The Solicitor’s Agreement provided for a more restrictive commission rate than what was previously agreed to.  Further, the Solicitor’s Agreement allowed TDI to revise the commission rate at its sole discretion. Hobbs subsequently signed the document as he would otherwise not receive payment. As time passed, Hobbs was not paid the commissions that he believed were owed to him; therefore, he resigned from the company and sued TDI for the outstanding commissions.

The Ontario Court of Appeal considered the enforceability of the Solicitor’s Agreement. The Court of Appeal determined that the agreement did not form part of Hobbs’ employment contract for lack of consideration. As a result, the Court of Appeal ordered TDI to pay Hobbs the commissions he was owed based on the earlier oral agreement.  In reaching this decision, the appellate court reviewed a number of leading authorities on the requirement of consideration in employment contracts and stated:

[32] … [Francis v Canadian Imperial Bank of Commerce] makes it clear the law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and rely on the continued employment relationships as the consideration for the new terms.

[35] In Techform Products Ltd., Rosenberg J.A. similarly recognized that new consideration is required in order to modify an existing employment contract. He stated at para. 24:

It is also consistent with the principle fundamental to consideration in the context of an employment contract amendment — that in return for the new promise received by the employer something must pass to the employee, beyond that to which the employee is entitled under the original contract. Continued employment represents nothing more of value flowing to the employee than under the original contract.

The Court of Appeal further addressed the power imbalance in employment relationships and the vulnerability of employees in relation to their employers at para. 42:

The requirement of consideration to support an amended agreement is especially            important in the employment context where, generally, there is inequality of         bargaining power between employees and employers. Some employees may enjoy             a measure of bargaining power when negotiating the terms of prospective       employment, but once they        have been hired and are dependent on the remuneration of the new job, they become     more vulnerable.

What do these cases mean for employers?

The above noted decisions clearly stand for the proposition that an amendment to a pre-existing employment contract will not be enforced unless there is an added benefit to both parties. A basic rule of thumb for employers to follow is to have an employee sign a contract that is suitable to the employer before the employee commences his or her employment.  Alternatively, it is critical when introducing new terms to a pre-existing employment contract that employers provide fresh consideration to the employee.  The lack of fresh consideration increases the risk that the modified terms of an employment contract will not be upheld by a court of law.

What would be considered adequate consideration?

There are no cases that outline a specific test to determine what constitutes adequate consideration when an employer modifies the terms of employment.  In Krieser v. Active Chemicals Ltd.[4], Neilson J. provides some guidance as to what would form adequate consideration in the employment context. At para. 35, Neilson J. stated:

I have found, however, that the defendant must show something more than continuation of the plaintiff’s employment on more onerous terms for an uncertain time to establish adequate consideration. Some additional advantage must flow to the plaintiff for agreeing to the new terms. I find that the defendant has failed to establish that here. There is nothing in the terms of the Contract that confers a benefit on the plaintiff. Nor do I see any basis for concluding that signing it provided him with any increased security of employment, either expressly or implicitly. The plaintiff remained a probationary employee under both the Contract and the Act, and could be dismissed with no notice during the first six months of his employment. While the Contract thereafter provided more generous notice provisions than the Act, these were less generous than his common law rights once several years of employment had been completed.

Neilson J. indicated that the consideration must be some ‘additional advantage’ moving to the employee.  Yet, it is unclear what this additional advantage must be.  In the writer’s view, the nature of this advantage would invariably depend on the type of position that is held by an employee.  Some advantages may include an increase of vacation pay, notice requirements, life insurance, severance pay, or health and dental benefits. The sufficiency of consideration is still an open question at this point; however, it is a significant issue that will likely have far reaching implications for employers and workers throughout Canada.


[1] 2002 BCCA 452.

[2] (1996), 21 B.C.L.R. (3d) 157.

[3] (2004), 246 D.L.R. (4th) 43.

[4] 2005 BCSC 1370.

 

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Posted by Shafik Bhalloo (posts) | Filed under Labour & Employment, Other | ....
Shafik Bhalloo
Wednesday, July 4th, 2012    Posted by Shafik Bhalloo (posts)
Shafik Bhalloo
Shafik Bhalloo has been a partner of Kornfeld LLP since 2000. His practice is focused on labour and employment law, and on commercial and civil litigation. He is also an Adjudicator on the Employment Standards Tribunal and an Adjunct Professor in the Faculty of Business Administration at Simon Fraser University.

Importance of Employment Contracts

The importance of having a written and executed employment contract is invaluable for both the employer and the employee as it provides a written account of the agreement between the parties and affords the parties a clearer understanding of their duties, responsibilities and obligations to each other in their employment relationship.

Employment contracts may be created through a verbal agreement or implied by the behaviour and conduct of the parties[1]. More often than not, employers will enter into a verbal agreement with their employees based on a handshake. Absent a written employment agreement, if a conflict arises between the parties particularly with respect to the terms of their agreement, the situation can very fast turn into the employer’s word against the employee’s.  In such case, there is a real risk that the employer may be saddled with an obligation it never meant to undertake. Therefore, having a written contract of employment setting out clearly the essential terms of the agreement between the parties will go a long ways to curtail the possibility of a dispute between the parties later in their relationship.

Key Clauses in contracts

There are a number of key clauses that should be included in an employment contract. However, it should be noted that this discussion is not exhaustive and the requirements for different industries may vary.

It is suggested that employment contracts at minimum contain the following key terms:

(a)                Parties – although it may appear to be obvious, it is critical to identify the correct parties to the contract. For example, if an employee is technically an employee of a subsidiary versus the parent company, this information needs to be correctly reflected in the employment contract. The parent may not want to unwittingly take on an obligation to the employee, although much will depend on how the relationship of the employee plays out with the parent company and the degree of the relationship between the parent and subsidiary companies in practice as there is, at common law, the doctrine of common employer that allows the court to treat different entities as one employer for the purpose of attributing to liability for damages flowing from such actions as wrongful dismissal[2].

(b)               Term– the duration of the relationship between the parties should be worded to reflect the agreement between the parties. We caution employers from using a specific end date unless both parties are clear that the employee will be engaged for a fixed term. If the parties agree on a fixed term and an employee ends up working for the employer beyond the end date of such term the courts will determine that the employee was intended to be a permanent employee. In the event that the courts make this type of determination, the limits on the employer’s obligations contained in the employment contact may be nullified. For example, in terms of termination notice, the employer in such case may be held responsible to provide the employee reasonable notice of termination or pay in lieu of such notice.

(c)                Hours and location– the employment contract should specify whether the employer is expecting the employee to devote full working time and attention to the business affairs of the employer. For greater clarity, the employer may want to specify in the contract the number of hours an employee shall be required to work each week and the location of work. In some industries and in some positions, the hours of work the employee will be required to work may be irregular or vary. The contract should specify this so that there is no misunderstanding on the part of the employee

(d)               Title and Job Description – the employment contract should include the employee’s title and a description of an employee’s duties; however, this description should include some flexibility in the language to allow for additional duties to be assigned and to avoid the possibility of a constructive dismissal claim.[3]

(e)                Compensation and Benefits – the employment contract should specify the employee’s remuneration. More particularly, the contract should delineate the employee’s gross annual salary and how it will be paid-for example, in equal bi-monthly or semi-monthly instalments. If there is any bonus plan and the terms of that plan, whether there are any milestones that need to be achieved to earn the bonus and if the employee must be employed at the time the bonus is payable and such other requirements for earning a bonus.

(f)                 The contract should also specify any benefit plans such as health and welfare benefits the employer may be providing directly or arranging through a third-party or outside provider. The contract should specify if there is any obligation on the employee’s part to pay any premiums for any benefit plans and if there is any eligibility requirements such as a waiting period before the employee is eligible for the benefits. If any benefits are provided by an outside third-party then the employer may want to make sure to state in the contract that the employee’s rights under these benefit plans shall be determined entirely by the terms and conditions of the plans and the employee shall have no independent rights as against the employer in connection with the said benefits. This may prevent the employee who is denied coverage or had their claim for benefits denied by the third-party provider to pursue the employer for their losses.

(g)                Probation period – if the employer has no previous experience with the employee and wants to make sure that the employee is suitable for the position, the employer may want to include in the employment contract a probation term. Probation term is essentially a trial period during which the employer will assess and evaluate the employee to determine if she is suitable for long-term employment with the organization.

(h)                Vacation – the amount of vacation time that an employee shall receive should be included in their employment contact.

(i)                  Expenses – if an employee should receive reimbursement for their expenses, the contract should set out what sorts of expenses are reimbursable and the process the employee is required to follow (submit receipts within a set period) to obtain reimbursement.

(j)                 Manuals or Policies – if the employer has a policy or procedures manual that they wish the employee to follow, the manual should be incorporated by reference into the employment contract.  The employer should provide such manual to the employee as soon as they are hired. The employer should also provide the employee with any updates to the manual within a reasonable period of time.

(k)               Confidentiality – if the employee has access to confidential information in connection with the employer’s business, the employment contract should contain express terms regarding how the employee will treat such information so that the employer’s confidential information is not at a risk of being misused or getting in the wrong hands or disclosed to competitors.

(l)                  Post employment restrictive covenants – if an employer is concerned that the employee may leave the employer and compete with the employer or solicit business in competition with the employer from the employer’s customers, the employer may consider including in the employment contract properly drafted post employment restrictive covenants. Two common types of restrictive covenants in employment agreements are non-competition and non-solicitation covenants. A non-competition covenant is intended to prohibit a departing employee from competing with her former employer and a non-solicitation covenant prohibits the departing employee from actively soliciting her former employer’s clients. The latter is narrower in scope and more likely to be upheld. Having said this, it is important to note that if any restrictive covenant goes beyond what is reasonably required to protect the employer’s proprietary interests-client relationships, confidential pricing information, client lists, and such-the courts will not enforce the clause. It is important that the employer discuss with their legal counsel what proprietary interest they need to protect so that counsel may best advise on the type of post employment restrictive covenant to include in the contract.

 

(m)              Termination – it imperative that an employment contract sets out the termination provision for an employee and particularly the amount of notice that an employee is entitled to receive if they are terminated without cause. Under no circumstances should the termination clause violate the notice provisions of the provincial Employment Standards Act, otherwise such a clause will be unenforceable and the employer may be exposed to a greater notice or severance requirement at common law-reasonable notice. It is also important to note that if the employer wants to curtail its notice obligations to the minimum provided in the provincial Employment Standards Act, the employment contract should contain clear language expressing that intent otherwise the employer will be at risk to provide reasonable notice to the employee where the employer is dismissing the employee without cause.

If the employer wants to avoid disruption to its business when the employee decides to quit, the employer may want to include in the employment contract a notice requirement or obligation on the employee. For instance, if the contract provides that the employee must give 30 days notice of termination of her employment, the employer may have sufficient time to hire her replacement and not suffer any disruption in its business as a result of the departing employee.

(n)                Termination – it imperative that an employment contract sets out the termination provision for an employee and particularly the amount of notice that an employee is entitled to receive if they are terminated without cause. Under no circumstances should the termination clause violate the notice provisions of the provincial Employment Standards Act, otherwise such a clause will be unenforceable and the employer may be exposed to a greater notice or severance requirement at common law-reasonable notice. It is also important to note that if the employer wants to curtail its notice obligations to the minimum provided in the provincial Employment Standards Act, the employment contract should contain clear language expressing that intent otherwise the employer will be at risk to provide reasonable notice to the employee where the employer is dismissing the employee without cause.

If the employer wants to avoid disruption to its business when the employee decides to quit, the employer may want to include in the employment contract a notice requirement or obligation on the employee. For instance, if the contract provides that the employee must give 30 days notice of termination of her employment, the employer may have sufficient time to hire her replacement and not suffer any disruption in its business as a result of the departing employee.

 

(o)               Entire agreement – employers should consider including a statement that the employment contract constitutes the entire of the agreement between the parties. The purpose for including this clause is to ensure that there are no outside discussions imported into the employment relationship.

Drafting Errors

The use of plain language in drafting any type of commercial contract is recommended, and it is especially important in the context of employment contracts where there is, in many cases, a significant imbalance in the sophistication levels between the parties with the employers having the upper hand. Having said this, it is critical that both parties understand the terms of the employment contract. There is often confusion and errors made by employers in connection the use of ambiguous language. Drafting errors can lead to significant consequences for employers because the courts will often favour the position of the employee versus the employer due to the power dynamic between the parties. Therefore, both employment lawyers and employers need to mindful of what they are trying to convey in their employment contracts.

Recommendations / Conclusion

Beyond having a binding a legal agreement in place between the parties, an employment contract carefully drafted by an employment lawyer should provide both parties with a point of reference that clearly set out each party’s obligations for the term of the contract. In the event that the parties have not entered into a written employment contract, the Canadian courts acknowledge that they will often look to the intent of the parties to import the rights and obligations that they view as appropriate in the context of an employment relationship. [4] As a result, in the absence of an employment contract, an employer may potentially end up having more obligations to an employee than either party intended.  Therefore, it is advisable that employers take the time and expend the necessary resources prior to an employee joining their team and thus reduce or curtail the possibility of later litigation.  The costs of litigation will always outweigh the costs of having an employment contract prepared.

 


* The author thanks Sarah Sidhu for all her assistance in co-authoring this paper.

[1] Canada Square Corp. v. VS Services Ltd., [1981] O.J. No. 3125, 34 O.R. (2d) 250 at 260 – 61 (Ont. C.A.).

[2] In Sinclair v. Dover Engineering Services Ltd., 1987, CanLII 2692, the BC Supreme Court, in determining who was the employer of the employee in context of a wrongful dismissal action where one company hired him and another, a holding company, paid his salary, stated:

As long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or in equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract. What will constitute a sufficient degree of relationship will depend, in each case, on the details of such relationship, including such factors as individual shareholdings, corporate shareholdings and interlocking directorships. The essence of that relationship will be the element of common control.

 

[3] Faber v. Royal Trust Co., 145 D.L.R. (4th) 1 [1997] 1 S.C.R. 846

[4] [2001] O.J. No. 1574, 8 C.C.E.L. (3d) 204 at 210 (Ont. C.A.), leave to appeal refused [2001] S.C.C.A No. 339 (S.C.C.)

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