How to create an enforceable employment agreement

By Stuart Rudner
|Canadian Employment Law Today

In CELT #417, July 7, 2004, I wrote about the advantages that can be gained by having an enforceable employment agreement in place. The key word is “enforceable.” Many employment agreements are, to use a somewhat tired expression, not worth the paper they’re written on. The key is not only to draft an employment agreement properly, but also to have it executed properly. Otherwise a court may find that it is unenforceable.

Scenario one:

John interviews with a company. During the course of the interview, they discuss the duties and responsibilities of the position, the salary and the vacation entitlement. The next day the company calls John and offers him the position at the salary discussed. John accepts, and it is agreed he will start work the following Monday. When the employee arrives at work on the following Monday, he is presented with an employment agreement which he is asked to sign. The employment agreement addresses issues including hours of work, overtime, confidentiality, non-solicitation of clients, non-competition, and notice of termination. John signs immediately and hands it back.

Scenario two:

Same as scenario one, but John is given one week to review the agreement and sign.

Scenario three:

Same as scenario two, but John is also encouraged to seek independent legal advice regarding the agreement before signing.

Question:

Which of the above has created an enforceable agreement?

Answer:

Likely, none.

In each case the parties had a verbal agreement in place once the job was offered and accepted. The terms of that agreement include those specifically discussed, such as the position, duties and responsibilities (to the extent they were discussed), salary and vacation. In addition the law will imply a wide range of terms over and above those discussed, including statutory holidays, leave entitlements and requirements for notice of termination.

A verbal agreement is created at the time of acceptance of the verbal offer. Once that agreement exists, it cannot simply be replaced by a written one that, typically, would benefit the employer.

A fundamental concept of the law of contracts is that there must be consideration flowing from each party to the other. By way of example saying “I will give you a million dollars” is, at law, a “mere promise.” It is not enforceable because the benefit is only flowing one way. However, saying “I will give you a million dollars for your watch” constitutes an offer. If you accept a contract has been created.

Once a contract exists it cannot be changed without new consideration flowing both ways. If a verbal employment agreement exists, the company cannot simply come along and ask the employee to sign a new contract with new benefits to the employer but no benefit flowing to the employee. There would be no consideration to the employee and the new contract would not be enforceable.

To avoid this problem the company should have the prospective employee sign an agreement before starting employment. The employee should be advised the company is prepared to make an offer of employment, the details of which will be set out in an agreement to be provided to them. If the offer is made in person the agreement can simply be handed to them.

But any offer should be made with an express reference to the written agreement to be signed. It should be made clear the offer of employment is conditional upon acceptance of the terms set out in the agreement. Furthermore a prudent company will provide the employee with a reasonable period of time to review the agreement and seek independent legal advice.

If the employee has already been offered a job, and accepted, all is not lost. The situation can be remedied before the employee starts working or even years later. Consideration can be provided in exchange for the employee entering into a new written agreement that changes the terms of his employment.

Such consideration can include a new benefit, such as a signing bonus, promotion, or additional compensation. It can even take the form of an agreement not to terminate the employee. But in order to satisfy a court on this basis, it must be shown the company would actually have dismissed the employee if he did not sign the new agreement.

A discussion of the enforceability of employment agreements can form the subject matter of an entire book. But here are a few tips companies should bear in mind in creating an enforceable employment agreement (in addition to the issues mentioned above):

Avoid ambiguity

: The courts will generally interpret an ambiguous contract in the manner most beneficial to the employee.

Don’t over-reach

: Do not include terms that are so oppressive that courts will bend over backward to avoid enforcing it.

Don’t breach applicable statutes

: Clauses that fall below the minimum requirements of employment statutes will be void – in the case of clauses regarding notice of termination, the courts will not substitute the provisions of the act; rather, the parties will revert to common-law requirements which can be significantly higher.

Include any and all referenced materials

: If the agreement refers to employment policies, guidelines and plans, attach them to the agreement.

Once an employment agreement is in place it is advisable to “confirm” its enforceability regularly. There have been some cases where, although the employee signed a valid employment agreement, the circumstances of employment had changed so drastically over the years that the courts held the contract was no longer enforceable. For example an employee that signs an agreement when he joins the company as a stock boy may not be held to the terms of that agreement when he is dismissed 30 years later, having ascended to the position of vice-president. In order to avoid such a result the parties can “renew” the agreement every now and then. For example they can do so when the employee is promoted, or receives a raise in salary, or even when they have their performance review. Such renewal can confirm that despite changes in position, responsibilities, and salary the terms of the agreement continue to apply.

These suggestions are hardly exhaustive. But they should be helpful in creating and maintaining enforceable contracts of employment.

Stuart Rudner practices civil litigation and employment law with Miller Thomson LLP’s Toronto office. He can be reached at (416) 595-8672 or via email at srudner@millerthomson.ca.

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