Monday, April 7, 2014

Can I Ask Existing Employees to Sign a Contract?

I've regularly posted about the importance to employers of having written employment contracts, and the pitfalls regarding their enforceability.  (Consider the recent Wellman case I discussed, where a contract could have held the employee to as little as one week's pay in lieu of notice - or about $1800 - but there was a problem with the existing written contract rendering it unenforceable, and the employer ended up on the hook for 4 months, being over $31,000 - and that's without even talking about legal fees.)

One of the major pitfalls is what we call "consideration":  For a contract to be legally enforceable, there has to be something flowing from each party to the contract.  In other words, if you want an employee to give up common law contractual rights, you have to give them something for it.  And the Ontario case law has generally come down on the side that "continued employment" isn't usually enough.

So the best time to put into place an employment contract is at the outset of the employment relationship - i.e. to put the terms of employment in an offer letter, or in a written contract put to the employee together with the offer.

There's a common practice of having employees sign off on all the 'paperwork', including an employment contract, in the first week of employment.  That generally doesn't work.  Even if it's the very first thing the employee does on the very first day of work, it may not be effective.  Indeed, there have been cases where contracts signed prior to the first day of work have not been enforced, because the operative question is whether or not the employment contract existed before the written contract was signed, and oral contracts are surprisingly easy to enter into.

There's a logic to this, too:  Suppose I offer you a job, and you accept.  You then put in your notice with your existing employer, perhaps make arrangements to move (notify your existing landlord you're leaving; sign a new lease), etc.  Then I put a contract in front of you with terms we haven't discussed before, with a probationary period, minimalistic entitlements to pay in lieu of notice, and onerous non-competition and non-solicitation terms.  It's the old 'bait and switch'.  Now that you've already given up your old job and can no longer afford to turn me down, I'm showing you that this job may not leave you in the position you had hoped.

So a lot of these contracts turn out to be unenforceable for a lack of consideration.

Is there any way to make a contract enforceable for an existing employee?

Sure there is.  Two ways, actually.  They're both conceptually very simple, but nuanced in practice.

The first way is to simply use "fresh consideration".  The classic way of improving or updating a contract is to attach it to a discretionary bonus or raise.  Thus, the bonus or raise becomes 'consideration' for the new contractual term.  (For other reasons, it is a good practice to have existing employees sign new contracts whenever you give them a promotion.)

Strictly speaking, consideration can be something pretty nominal - the classic law school example is a peppercorn.  In theory, one could imagine a scenario where you've worked for me for thirty years, would be entitled to 2 years' pay in lieu of notice at common law, but I ask you to sign a contract one day limiting you to 8 weeks' pay in lieu of notice of termination, and I give you a peppercorn as a signing bonus.  It likely solves the consideration problem, at least, but it's still not airtight:  Further imagine that I fired you the next day, and paid you out only your 8 weeks.  On the face of the contract, that should be fine.  But I have little doubt that the courts would find a justification to not enforce the written contract under those circumstances, and award you pay in lieu of reasonable notice.  Because, let's face it, it would be a travesty to let me get away with that one.

So it's a good idea not to use symbolic consideration, and it's also probably wise to ensure that they don't come out behind for having signed the contract (i.e. by getting fired shortly on the heels of signing the contract).  Whichever way you go, once you've decided that you want to be rid of an employee, it's probably too late to implement a new written contract.

The second way is to terminate the existing contract and present a new one.  There are a few nuances here - illustrated by the Wronko v. Western Inventory Service Ltd. case; an employer cannot simply amend the existing contract unilaterally in a fundamental way, even on reasonable notice.  If an employee refuses to sign a new contract, then you have to actually terminate the existing one and present a new one.  It is not enough to say, "Effective x months from now, these amended terms will take effect."  So a termination on full notice, together with the presentation of an offer of new employment, is often the appropriate solution.

Employer Takeaway

There's no time like the present to start addressing workplace law issues.  We can help draft contracts for your new and existing employees, and help you to ensure that they are implemented in such a way as to maximize their chances of being enforced by the courts.

This issue exemplifies the saying that "a stitch in time saves nine".  Having an enforceable employment contract not only tends to limit your post-employment liabilities, but also improves certainty and reduces the need to expend significant legal fees.


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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation.  If you need legal assistance, please contact him for information on available services and billing.

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