Thursday, December 9, 2010

How to Make a Written Employment Contract Binding

First off, let me be very clear on one point: I am not talking here about post-employment releases. Those aren't so difficult to make binding, but the analysis is slightly different. What I am talking about here is how to prepare and execute a written employment contract in such a way as to be able to rely on its terms.

Most of the written terms of the contract are never really going to matter. The written terms of the employment contract that define the day-to-day relationship between the employer and employee...well, they help to define the relationship at the start, and to develop realistic expectations on the part of all parties, but in many ways the employment relationship is a living relationship that is defined in a de facto way, and not by the agreement made at the beginning.

Where the written employment contract really matters is on termination, because it will often have provisions that define how the employment relationship may be terminated, and other provisions setting out obligations that survive termination.

In particular:

(1) A written employment contract will frequently (and ought to) have a term setting out a formula for the amount of notice of termination, or pay in lieu thereof, and

(2) For some employment relationships, contracts include terms surviving termination including non-disclosure, non-solicitation, and non-competition.

Without an express written term setting out the amount of notice required to terminate the contract, the default is "reasonable notice" at common law, which is usually fairly generous to the employee, often giving significantly more than the statutory minimums.

Likewise, without express restrictive covenants, the implied terms at common law are not generally very favourable to an employer.

The first, and most important, tip that I can give you for getting a written employment contract that actually works is this: Consult a lawyer. Self-promotion aside, it is actually important. Human Resources Professionals and consultants are helpful, and can do a lot of the groundwork, but there are nuances of contract drafting and execution which you need a lawyer's advice to make sure you're getting right.

Here are a few of the pitfalls (not a comprehensive list):

(1) Lack of consideration

This is a big one. In law, in order to have a binding contract, there needs to be "consideration", something of value which each side is agreeing to contribute. If we agree that I will shovel your driveway after every snowfall this winter and get nothing in exchange, then you can't hold me to that - it's not a contract. However, consideration need not necessarily be market value. If our agreement (re driveway shoveling) includes a term that you will provide me with a single peppercorn next fall...put your feet up, because that's a contract. (And no, I'm not actually offering to enter into such a contract.)

So you're wondering how this applies to a written employment contract: Seems a straightforward quid pro quo, no? The employee provides services; the employer provides a remuneration package.

That's how it's supposed to be. The trouble is this: What happens if the employee already has the job, and you're asking him to agree to a variation in its terms?

Remember this: Every employee has an employment contract. If it isn't written, that doesn't mean it's not a contract. And the implied terms of an oral contract at common law give employees a fair bit of protection. So if I already have my job, my oral employment contract, and you as the employer come to me and say "I want you to sign this contract that says that you'll work for me as you're doing, I'll pay you as I'm doing, and I can terminate the contract on a certain amount of notice or pay in lieu thereof"...what am I getting by signing the contract?

Yes, there's a clever answer, which has been repeatedly tried at the Court: By signing the contract, the employee avoided getting fired right then and there. Well, it wouldn't be a 'just cause' termination - the employer can't require the employee to accept such a term in such a way that refusal would be insubordination. It would be termination on notice, as the employer is entitled to do...and remains entitled to do (in theory, more easily) following the execution of the contract, and accordingly has not actually given anything of value.

(In one case, the Ontario Court of Appeal bought an argument of "consideration by forbearing from exercising its right to terminate"; however, in another two subsequent cases, the Court of Appeal made it clear that the earlier decision was rooted in a unique fact that the employer had impliedly promised not to fire in the near future in exchange for the execution of the contract.)

Essentially, what's required when modifying an existing employment contract is "fresh consideration" - something else given in addition to the job that the employee already has.

But this doctrine goes a step further, and doesn't just apply to modifying contracts of people we might think of as 'existing employees'. It also applies to new hires. When an employer brings in a new employee, starts the employee working, and only puts a contract to them later - a day, a week, a month, or a year, whatever - the Courts have consistently held that the terms aren't binding without fresh consideration. That's easy, right? Same analysis as above. But what about signing the contract at the start or even before the start of employment? Picture this:

I interview you. I explain to you the job duties, the hours, the compensation, the reporting structure...then, after the interview, I call you and ask you "When can you start?" Then, on your first day of work, I put you through the usual 'orientation' - reviewing policies, getting payroll matters sorted out, and signing the employment contract.

This isn't unusual. Lots of employers do it this way. (I recall a Small Claims settlement conference when I was on the employee side, and the employer's counsel took the position that I was raising hay about nothing because that is such a common way of doing it.)

The trouble, however, is that the employment contract already exists. I have offered you the job, and you have accepted it. Unless you already knew that you would be required to sign a contract, and/or were aware of the terms that would be in the contract, there's a good chance that the written contract will be set aside without fresh consideration. In one case in particular, the employee even signed the agreement prior to commencing employment, and it was still void for lack of consideration.

And it makes a certain amount of sense: I offered you a job. You thought you knew its terms. Maybe you already quit your old job, or moved cities, to come start employment with me. Suddenly you're in the door, relying on this job for your day-to-day expenses, and I'm saying "Sorry, you don't actually have the job unless you sign this." There's good reason for the Courts to scrutinize such circumstances closely. Note, however, that while quitting an old job or moving might help evidence of the existence of the employment contract, such reliance is not strictly necessary to engage this doctrine.

(2) Illegality of Terms

Well, the employer's not asking the employee to do anything criminal, right? So it's okay? Not that easy. This pitfall usually applies to termination clauses, allowing for termination on a certain amount of notice.

The Ontario Employment Standards Act, 2000 provides a formula for statutory minimum entitlements on termination. A clause which provides less than the minimum, therefore, fails.

And it isn't just a bump-up. If the contract says "The employee gets nothing", then the Courts aren't going to look at it and say "Well, clearly the parties intended that the employee would get no more than legally required." No, instead the Court will look at it, strike the clause entirely for illegality, and then look at the contract (which now has no termination clause) and say "Well, I guess we have to imply a termination clause. Reasonable notice it is."

Under the ESA (mind you, this varies by jurisdiction - different formulas for Federal employers and employers in other Provinces), the minimum notice runs as follows:

Length of Service - Minimum Notice
Under 3 months - nothing
3 months but under 1 year - 1 week
1 year but under 3 years - 2 weeks
3 years but under 4 years - 3 weeks
4 years but under 5 years - 4 weeks
5 years but under 6 years - 5 weeks
6 years but under 7 years - 6 weeks
7 years but under 8 years - 7 weeks
8 years or more - 8 weeks

An important note, however, is that even formulaic deficiency can render a clause void. If it doesn't comply with the standards, the clause itself is void ab initio, and is of no force and effect. So let's say a contract says that the employer can fire on provision of 1 month's notice, and the employer fires an employee with between 3 and 4 years of service. The statutory minimum is 3 weeks, right? The contract gives a little bit extra. Doesn't matter. The fact that the provision failed to account for the minimums which the employee would have been owed at 5 years of service or more means that the clause is void entirely. Reasonable notice it is.

Or what happens if you say something like "2 weeks per completed year of service, up to a maximum of 10 weeks"? The formula keys notice to length of service, much like the ESA, and provides a cap in excess of where the stat minimums cap out...should be fine, no? Wait a second, no: Look at the entitlement for employees with more than three months but less than one year: Under the ESA, minimum 1 week, but under the contract, nil. Even if the employee doesn't get fired within the first year, the formulaic deficiency still voids the contractual term entirely. Reasonable notice it is.

Usually, language that keys the formula to the statutory minimums is going to be fine. But even then it has to be carefully drafted: In one case, an employee signed a contract which gave him the greater of the Ontario ESA minimums or four weeks. The employee then transferred to British Columbia, and was later terminated. Because the Ontario formula is different (and in some cases less) than the B.C. formula, and the termination of employment was under B.C. law, the B.C. Court of Appeal found that the clause was formulaically deficient and therefore unenforceable.

So if you specify the Province's laws, you might be in trouble. If you just say "under the applicable Provincial law", that is likely too ambiguous to be enforceable.

Starting to see why you need a lawyer?

(3) Terms are against good public policy

This is one that can apply to restrictive covenants such as non-competition clauses or non-solicitation clauses. Essentially, you can't just make it a term of every employment contract that "You can never compete with us." Restraint of trade is something that the Courts don't like. Telling an employee that he can't continue to work in the industry at all unless it's for you...well, it gives the employer too much power in an already imbalanced power relationship, so there has to be a really good reason to do it.

I'm going to be brief on this, because it really is one that is full of legal nuances, and there's no question at all that you should talk to a lawyer about drafting and executing a restrictive covenant...

...but, put in very simple terms, the employer needs to be able to show that they *need* the term in order to protect a legitimate proprietary interest, and that some lower form of restrictive covenant couldn't provide adequate protection. Usually we're talking about proprietary information (privy to confidential business strategies, research and development, etc.), or proprietary relationships with clients or others. (I trust you to be 'the face of my business'. You're in charge of interacting with all my clients on behalf of the business, and build a relationship for years. Then you decide to start your own competing business. I might have a proprietary interest in those relationships.) Then the question arises as to whether a non-competition clause is necessary, or would a non-solicitation clause do the job? It's really about what is necessary to prevent the employee from being able to unfairly compete.

Beyond that, the employer needs to establish that the terms of the restrictive covenant are geographically and temporally reasonable. "You can't compete with us anywhere, ever" would not be reasonable. But "You can't compete with us in this region, over x period of time"...well, it depends on the circumstances. Some industries are faster moving without real geographical boundaries. So if you're working in the sector, maybe a wider geographical scope might be reasonable, but your proprietary information becomes stale much more quickly, so a shorter temporal scope might be appropriate.

It's all very fact specific. And there's no halfway. Either the clause is valid, or it isn't. Either the terms are reasonable, or it isn't. If it is valid, then the employee (who will usually have been breaching it for a while before there's a judicial interpretation) is in deep trouble. If it's not valid, then the clause fails in its entirety and provides no protection whatsoever to the employer.

Hence why it's important to have a lawyer.


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.

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