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Negotiating changes to the employment contract

If you want to revise fundamental terms immediately, the only way to do it is to negotiate the new agreement and provide something of value in exchange for the employee's acceptance

By Stuart Rudner

In previous posts, I discussed constructive dismissal and how to impose changes to the employment agreement by providing notice. If an employer wants to change the agreement, the other way to do it is to negotiate the changes and provide something of value (known is legal circles as "consideration") in exchange for the employee's acceptance of the new terms.

As an aside, the same analysis will apply in situations where an employer hires someone pursuant to a verbal agreement, or a brief offer letter, and subsequently wants to implement a more detailed written agreement. Since they will effectively be replacing the existing contract and changing fundamental terms of the relationship, doing so unilaterally and without notice could constitute a constructive dismissal (or render the new contract unenforceable). They can either provide notice (as discussed in my last post) or negotiate a new agreement.

A basic premise of contract law is that all contracts require consideration to flow from each party to the other. A contract involves each side giving and receiving a benefit. Without consideration flowing both ways, all you have is a gratuitous promise: "I will give you $1 million" is not a contract, no matter how much you would like it to be.  Consideration is required to form a contract, and it is also required to amend one. The consideration can be a new benefit to the employee (for example, an improved medical plan), a promotion, salary increase, bonus or anything else of value.

It may be possible to provide consideration by agreeing, explicitly or implicitly, to forbear from terminating the employee. However, such forbearance must be bona fide. The court must be satisfied that either

(a) the employer's intention was to terminate the employee unless they agreed to the amendment; or

(b) in exchange for the employee's agreement to the amendment, the employer agreed not to terminate the employee for a given period of time.

Otherwise, the court may not be satisfied the employee received any consideration, and the contract, or amended contract, will not be enforceable. This issue was addressed by the Court of Appeal of Ontario in Techform Products Ltd. v. Wolda. The court confirmed that

"Where there is no clear prior intention to terminate that the employer sets aside, and no promise to refrain from discharging the employee for any period after signing the amendment, it is very difficult to see anything of value flowing to the employee in return for his signature. The employer cannot, out of the blue, simply present the employee with an amendment to the employment contract and say, "sign or you'll be fired" and expect a binding contractual amendment to result without at least an implicit promise of reasonable forbearance for some period of time thereafter."

In Techform, the employer had the plaintiff sign an amended contract in which the employee assigned all rights to inventions that he conceived while working for the defendant. The trial judge found as fact that if the employee did not sign the amended contract, his contract would have been terminated on 60 days' notice. However, the trial judge held there was no real consideration flowing to the employee and that the amended contract was therefore unenforceable. On appeal, the Court of Appeal found the forbearance from terminating the relationship was proper consideration for the new contract, which was therefore enforceable.

The facts in Techform were such the court found a legitimate intention on the part of the employer to dismiss the employee if he did not sign the new agreement. If such an intention cannot be shown to exist, then the forbearance argument will not stand up. Employers must be mindful of this requirement and of the possibility that, sometime in the future, they may have to prove that such an intention existed. Internal memoranda or other documentation are quite helpful in this regard. Unsubstantiated evidence that we "really, really would have fired him" may not be quite as compelling.

If an employer is not prepared to terminate employees that do not accept the proposed changes, they can either proceed as discussed in my previous post and provide reasonable notice of the change, or they can find some other form of consideration to offer.

I often advise clients to consider implementing new agreements when they promote an existing employee or offer an increase in compensation (as long as it is not an automatic one). Of course, the consideration provided should be clearly documented. Whenever you draft or amend a contract, it is advisable to obtain legal advice.

Stuart Rudner is a partner in the Labour & Employment Law Group of Miller Thomson LLP, a national law firm. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or srudner@millerthomson.com. You can also follow him on Twitter @CanadianHRLaw and join his Canadian Employment Law Group on LinkedIn.

Stuart Rudner

Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw. He can be reached at srudner@rudnermacdonald.com.
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2 Comments
  • Employment contracts
    Thursday, April 24, 2014 1:42:00 PM by Stuart Rudner
    CJS, I would be happy to advise you offline. Please email me at srudner@rudnermacdonald.com.