Why bother having employment contracts? Many business owners who have become embroiled in a wrongful dismissal action, or even received a demand letter from a lawyer on behalf of a terminated employee, have no doubt asked themselves this question at some point in time.
They think to themselves about how they tried to do things right. When they on-boarded an employee, they had them sign their standard employment agreement. That should limit the company’s exposure to a wrongful dismissal claim, right? Cut to: several years later, they terminate the employee and they hear someone like me tell them that the termination provision in their contract is unenforceable, and they owe the employee not just their minimum entitlements under employment standards legislation, but reasonable notice upon termination. Those who have had this happen to them will know there is a big difference between what an employee is owed under employment standards legislation as opposed to the common law. Not having an enforceable termination provision can be a very costly mistake.
Given that these termination provisions attract so much judicial scrutiny and are very difficult to enforce, why bother having them? Why bother having any contracts at all? Would we all be better off simply not using them, and saving ourselves the administrative and legal costs related to their upkeep? While it is tempting to give in to this type of thinking, the costs stemming from this approach would be much greater for the business.
It is important to understand what contracts can and cannot do. With that understanding, you will come to appreciate the value of, and the protection afforded by, an Employment Contract.
1. Employment Contracts are not a cure-all
Some business owners have inflated expectations about what an employment contract can achieve. As I tell all my clients, having the most pristine employment contract will never completely eliminate risk. For example, no matter what I put into an employment agreement, it will never eliminate the risk of a human rights claim. However, having a proper understanding of the limitations of the contract should encourage business owners to do other things, like implement a process for assessing accommodation requests, which will make legal claims less likely.
Employment contracts are just one tool in your toolbox for reducing your liability to your employees. Don’t saddle the contract with unrealistic expectations.
2. A signature is not what makes the contract enforceable
Like any contract, an employment contract must involve consideration exchanged from one party to the other. The employee must receive something of value, in exchange for agreeing to the written terms of the contract. Simply having an employee sign a contract without any consideration is useless and will render the contract unenforceable. There are two common ways that this can happen.
First, an employer may tell a candidate (in an email or verbally) that they “got the job” without any mention of the employment contract. Then the employee signs the contract on their first day, but because they already “got the job” the employee is receiving nothing of value for agreeing to the written terms of employment. Business owners should always make the offer of employment contingent on the employee’s execution of the contract. So, while it is tempting to tell the candidate they “got the job” save the celebratory email for after the employee executes the written agreement.
Another common mistake is to simply have an existing employee sign a contract. But again, without fresh consideration (e.g. a signing bonus), the contract will not be enforceable.
Where there is any doubt about the issue of whether there is consideration, it is always worth it to add a modest signing bonus to ensure the enforceability of a contract. Trust me, it’s worth the money in the long term.
3. Employment contracts can, but rarely will, make things worse
If you have realistic expectations of your employment contract, then you can see their value. For example, many business owners know that restrictive covenants (like non-solicitation provisions) are notoriously difficult to enforce. That said, I can’t tell you how many employees reach out to me who are considering leaving their jobs, but are scared they may be in violation of a restrictive covenant. At the very least, these types of provisions have a cooling effect on employee (mis)behaviour. They make an employee think twice before they begin soliciting clients. Even if restrictive covenants are ultimately unenforceable, having them in your contract is advisable because of the potential positive impact on redirecting employee behaviour.
The same can be said of termination provisions. Having a termination provision in a contract that might be enforceable is better than nothing at all. These provisions can mean the difference between a very large legal claim and a very small one. On the whole, terminated employees are risk averse. If there is a chance that they would get nothing from a potential legal claim because of the presence of a termination provision, many will decide not to proceed, or to accept a lesser settlement.
Generally speaking, employment contracts will not make things worse. One notable exception is related to fixed-term contracts. A fixed term of employment means that an employee’s tenure with the company will automatically expire at some identifiable future date, as opposed to an indefinite term that does not impose a known end date of employment. Fixed terms usually require a written employment contract as evidence; they are not the default. Fixed terms are different than indefinite term agreements in that the presumption upon termination for a fixed term contract is not reasonable notice, but rather all remuneration owing for the unexpired term without the requirement to mitigate. That can be far more than what an employee would otherwise be entitled to receive. For example, a freshly hired employee on a one-year fixed-term contract who is terminated without cause after one month would be entitled to a modest amount of reasonable notice (perhaps 1-3 months). However, under the written terms of the agreement, they are presumptively owed 11 months of pay and benefits, without the requirement to mitigate their losses (i.e. find another job)!
I can’t tell you how many times I see a contract that was pulled off the internet or through some online portal that imposes a fixed term, for no discernable reason. When I ask the employer why they imposed a fixed term, they tell me they did not realize that they did. This is a costly mistake (and a cautionary tale for relying on templates you pull off the internet without understanding the legal implications of the terms they contain).
Just follow this simple rule: unless a lawyer tells you to impose a fixed-term contract, don’t do it. In almost all circumstances, the risks far outweigh the benefits.
4. Employment Contracts are never finished
Spoiler alert: your mom and dad’s employment contract for the family business from 1995 is not enforceable. Employment contracts need to be updated or at least reviewed every 1-2 years. You should think of employment contracts like workplace policies, they need to be reviewed and provided with TLC from time to time. Because the law in this area has the tendency to change, you should be having these agreements reviewed and, if necessary, updated by your lawyer. Yes, this will add to your administrative costs, but it’s sort of like going to the dentist. If you go in every six months and don’t miss an appointment, there will be far less pain than if you don’t have a checkup at all for a decade.
George Hamzo is a partner specializing in employment and human rights law. He is available to assist business owners draft employment contracts and policies, termination of employees, and responding to employee dismissal claims.
