Columns/Blogs Features Legal Terminations/Wrongful Dismissal
Changing the deal: updating employment agreements

EDITOR’S NOTE: ‘Legal steps & missteps: Addressing common workplace concerns’ is a weekly Talent Canada series, in partnership with John Hyde of Hyde HR Law in Toronto. This series takes a deeper look at issues in which organizations can be proactive to prevent legal issues and highlight where common errors occur.

The question: Can employers “update” employment contracts with existing employees?

The answer: Yes and no. Yes, it is possible in theory, and no, it is not as easy as many employers think.

The common misstep: If an existing employee simply signs an “updated” employment contract at the employer’s request without receiving anything of value in return, that contract is not worth the paper it is written on.

Despite the clear illegality of such agreements, this practice continues to be pervasive among employers. It is so common that it is one of the first questions attorneys ask new clients in matters involving employment contracts: “Was this contract signed before the first day of work, or after?”

It seems like a technicality perhaps, but to the courts, it is critical. Liability for wrongful dismissal can stand or fall on the circumstances in which an employee signs the agreement.

Why are employment agreements important for employers?

It is highly recommended that all Canadian employers have their employees sign employment agreements.

There are many good reasons to do so, but the most important purpose is to protect the employer from costly wrongful dismissal damages that can arise upon termination of employment.

Damages for wrongful dismissal can be costly, typically ranging anywhere between two and four times the termination pay prescribed by employment standards legislation.

What does it take to make employment agreements binding?

Employment agreements are powerful tools that can limit employer liability in the event of termination. Despite this, most employees sign their contracts without much thought or negotiation around terms other than pay.

Because of this dynamic, employment agreements are notoriously difficult to draft correctly and to enforce.

A single, seemingly technical issue can undermine an entire employment contract in the eyes of a judge, and cost an employer thousands of dollars.

One of the most common issues rendering employment agreements invalid is a lack of consideration. Consideration is a legal concept which states that, for any contract to be legally binding, something of value must flow to both parties.

An offer of new employment checks this box; an offer of continued employment does not. That is why, ideally, all employers should have new employees sign an employment agreement before they start work.

What is ‘something of value’ to make an employment contract binding on an existing employee?

Existing employees can sign and be bound by new, enforceable employment agreements, but only if they receive some concrete valuable benefit in return.

In the eyes of the law, “not being immediately fired” has zero value. An increase or change in job duties probably also has zero value, as does a change in title.

Typically, new employment contracts for existing employees are made binding by offering that employee fresh consideration in the form of either:

1. a signing bonus
2. a pay raise.

How ‘valuable’ must the fresh consideration be?

There is not much practical guidance in the case law on this.

Technically speaking, a “single peppercorn” should be good enough to make a contract binding, but courts may nonetheless decline to enforce contracts which they consider to be grossly unfair; for instance, where an employer presents a long-standing employee with an updated employment agreement that ends up costing the employee thousands in termination pay.

Unfortunately, there has not been significant development of this idea in the case law to date.

How can employers update an employment contract without the employee’s agreement?

In rare cases, employers sometimes encounter employees who, for whatever reason, do not want to sign an updated employment agreement, even if it means a raise or a signing bonus.

In these circumstances, there is really only one way for employers to force the issue: termination. An employee must be given notice that their employment will end on a specific date in the future.

The date must be far enough in the future that the notice is considered sufficiently “reasonable” to fulfill that employee’s termination entitlements — typically, a matter of several months.

The employee will then be offered new employment under a new agreement, which shall only become effective after the termination of the existing contract.

Because of the abrasiveness of this strategy, most employers will not do this for risk of harming their relationships with their employees.

Can an employer simply sign employees to a series of fixed-term contracts, so that they can be updated periodically?

No, this is not a good idea. Fixed-term contracts are very rarely worth the legal risk, unless there is a specific practical need to manage expectations.

First, an employee terminated while working under a fixed-term agreement can be entitled to sue for damages equal to pay for the entire balance of the term.

Second, if an employee works past the term of a fixed-term contract, that contract is no longer binding, and the employee’s termination entitlements are no longer limited.

Third, the “end date” in a fixed-term contract loses legal significance if the employee develops a practice of regularly re-signing a contract for a new fixed term.

The law is structured such as to give employees maximum leverage in the negotiation of their employment agreement.

Accordingly, prudent employers will seek the guidance of experienced employment attorneys prior to drafting or updating employment contracts.

John Hyde advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.

Nicholas Goldhawk, an associate at Hyde HR Law, co-wrote this commentary.