Saturday, September 17, 2011

Back to Basics: Is this contract enforceable?

Having yesterday posted about why you should use an employment contract, it's worth noting that there are a lot of ways to go wrong when drafting or executing an employment contract.  In addition to making sure that the terms of restrictive covenants are enforceable, there are issues that can invalidate termination clauses or even entire written contracts.  This is not an exhaustive treatment of the subject, but just some of the red flags.

(1)  Lack of Consideration

In law, a contract requires "consideration" - something of value flowing from each party in exchange for the promises of the other.  Now, you might think that, in an employment relationship, consideration is easy.  The employee gives the employer his labour; the employer reciprocates by giving the employee a paying job.

Not so much.

Oh yes, in theory, that's fine.  The challenge arises, however, when the employee already has the job, whether they've just recently created an oral contract or the employee has been there for 20+ years.  Because when the employer puts a contract to an existing employee, unless there is "fresh consideration" in the contract - something they're getting now that they weren't getting before - even the signed contract is, in law, just a meaningless piece of paper for lack of consideration.

It's quite common for a written contract to be put to an employee after they've already started in the job, and accordingly to be of no force and effect.  However, the difficulties are more onerous than that: even having the employee sign on day 1 or earlier doesn't necessarily get you around the consideration problem.  An agreement that is capable of forming a contract (i.e. with consideration and sufficient certainty as to its terms) is formed simply by offer and acceptance.  So there are cases, such as Alishah v. 1582557 Ontario Ltd., in which the employer offered a position, the employee accepted it, and the contract that was subsequently, though still before the start date, put to the employee and was signed was unenforceable.  (In that case, Alishah had quit his previous job after getting the job offer but before getting the contract.  That kind of reliance isn't strictly necessary, but is strong evidence of the existence of a contract.)

What about the employer argument that "Well, I didn't fire the person, as I would have had he refused to sign the contract."  Isn't that consideration?  The Ontario Court of Appeal has wrestled with this question a few times.  In the 2001 Techform decision, the Court found that, where the employer has at least tacitly promised to forbear from exercising its right to terminate the employee for a reasonable period of time, that constitutes consideration.  However, in the subsequent Hobbs v. TDI Canada Ltd. and Braiden v. La-Z-Boy Canada Limited cases, the Court construed that decision very narrowly.  It isn't enough that, in hindsight, the employer didn't fire the employee for a time after the signing of the contract, but rather it is necessary that the employer make a promise in advance not to fire for a reasonable period of time.

So what should an employer do?  With new hires, never communicate an offer without making it clear that the offer is subject to them accepting the terms of the written contract.  The best way is to make sure that the offer is in writing, with the contractual terms appended.  It's okay to call and say "We're sending you an offer with a written contract."  It is not okay to call and say "The job's yours if you want it" and then to unexpectedly send them the contract afterward.

With existing employees, give them something.  It doesn't have to be much - a small raise, a token signing bonus, even a peppercorn would do.  That said, it is theoretically possible that, with nominal consideration depriving the employee of substantial rights, there may be an argument to be made that the contract is 'unconscionable'.

(2)  Statutory Non-Compliance

If the termination clause does not adhere to the minimums under the Employment Standards Act, 2000 (again, speaking of Provincially-regulated businesses in Ontario), it is void.  If it's going to be a fixed amount of notice that doesn't change over time, it has to match or exceed the highest statutory minimum that might arise (i.e. 8 weeks).  If there's a formula, it has to match or exceed the statutory minimum in every instance.

Indeed, I think it's best to key the language to the statute directly, but even then you have to be careful:  In the British Columbia case of Waddell v. CINTAS Corporation, the employee had started employment in Ontario and his contract tied his entitlements to the Ontario ESA...then he transferred to B.C., where he worked until the termination of his employment.  The B.C. minimum entitlements are defined slightly differently from Ontario's and in some instances may be greater.  Thus, keying the entitlements of a now-B.C. employee to Ontario's statutory minimums had the result that the provision was void.

Conversely, in another B.C. case, Boule v. Ericatel Ltd., language keying the entitlement to "the applicable provincial law" was found too vague to be enforceable.  These are tricky, which is why it's very prudent to hire a lawyer with employment law expertise to draft your employment contracts.

(3)  The "Substratum" Argument

This is a less common issue (and becoming less so), but far easier to deal with.  Picture this classic scenario, where a person who started off in the mail room rose through the ranks to eventually become an executive.  Now imagine that, when starting in the mail room, he signed a contract with minimalistic entitlements.  The substratum argument is that the character of the employment has changed so much over the course of the relationship that the parties can no longer be held to the original contract; the parties could not have reasonably expected when signing the contract for a mail room assistant that it would apply to an executive.

But, as I said, it's easy to deal with:  Every time a person gets promoted, they should sign a new contract.  It should be made into a practice.  Of course, keep in mind the tips above about fresh consideration, but it shouldn't be too difficult since the promotion (and raise that would usually accompany it) would constitute fresh consideration.


This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

No comments:

Post a Comment