Agreeing to terms before the agreement
A signed document may not be worth the paper it's printed on
Oct 26, 2015
By Stuart Rudner
I have written many times about the need to enter into employment agreements properly to avoid the risk they will be unenforceable. Unfortunately, this continues to be an issue that prevents many employers from enjoying the benefits of the employment agreements that they spent time and money preparing, as they fail to implement them properly.
As discussed, on many occasions, to be legally binding, a contract must involve consideration flowing both ways. In other words, both parties must give and receive some sort of benefit. As my contracts professor in law school explained one day, if he was to walk in to class and offer one of the students $1 million in exchange for his T-shirt, and the student accepted, that would form a binding agreement (albeit ill-advised).
However, if the professor was to walk in to class one day and simply offer to give a student $1 million, and the student accepted, that would not be a binding contract, but rather a “gratuitous promise." The difference is that in the first scenario, both parties are receiving something; in the second, only the student is, and therefore the professor would not be receiving any consideration in exchange for his agreement.
The same concept applies to contracts of employment. At their very basic level, a contract of employment involves the individual agreeing to work in exchange for compensation. Of course, there are many other terms that can be included, either verbally, in writing, or implicitly pursuant to employment standards legislation or common law.
The challenge that continues to vex employers is they often engage in negotiations and agree upon the core terms of the employment relationship before a comprehensive agreement is signed. Typically, there will be discussion of compensation, position, duties, vacation and some other key terms. If both parties are in agreement, they will discuss a start date and often agree that they will proceed on that basis.
Once the core terms of employment have been agreed upon, and the parties agree that the individual will commence working on a certain date, there is, effectively, an employment agreement in place. When the employer subsequently asks the individual to sign a lengthier and more detailed agreement, which inevitably is for the benefit of the employer only, the individual is not receiving any benefit, or consideration, in exchange for doing so.
The employer cannot say that hiring her is the relevant consideration, since she were already hired pursuant to the previous discussions.
As I often explain, when an individual arrives for his first day of work and is asked to sign a contract of employment, it is clear that he already had some sort of agreement; otherwise, why would he have shown up for work?
This scenario plays itself out time and time again. Typically, it will not be an issue until the employer attempts to rely upon the written employment agreement that was signed after the parties had already agreed upon the terms of employment. This usually arises at the time of termination, when the employer seeks to provide notice or pay in lieu thereof in accordance with the termination provision of the contract, which never formed part of the verbal agreement between the parties.
In other words, there will be a signed agreement in place. However, employers should not assume they will be able to rely upon it.
Recently, the Ontario courts considered another example of this type of situation. In Buaron v. Acuity Ads Inc., the plaintiff was recruited from a competitor. A meeting took place, during which they agreed to the key terms of employment and left on the basis that the employee would sign a letter confirming the terms that had been agreed upon. Subsequently, the employer sent him a document to which it attached a letter that confirmed the core terms that had previously been discussed.
The plaintiff than resigned from his current employment with Acuity’s competitor. To his shock, he received a comprehensive employment agreement on the very next day. That new agreement contained terms that had never been discussed, including a termination clause that displaced his common-law entitlement to notice of dismissal. Since he had already resigned from his current employment, he felt he had no choice but to sign the agreement that was sent to him.
Mr. Buaron was dismissed without cause nine months later, and the company relied upon the termination clause in the agreement that he signed. The matter proceeded before a judge, who found that a contract of employment had been formed when the offer letter was received, prior to the sending of the more detailed employment agreement. The court referred to the seminal case of Francis v. Canadian Imperial Bank of Commerce, which confirmed the need for consideration in employment contracts.
As a result, Mr. Buaron was entitled to notice based upon the common-law principles of reasonable notice, which took into account factors including his length of service, age and position. He was awarded four months of compensation in lieu of notice.
Lesson for employers
This case is yet another lesson for employers. While it is certainly feasible and normal to engage in discussion regarding key terms of employment with a candidate, there should be no agreement and no assumption that the individual will commence working for the company until she signs the form of contract that you want to have in place. No start date should be confirmed, and no plans should be put in place, until that happens.
For example, the organization should not make any internal announcements about the hire, or begin the onboarding process — all of which would suggest there was an agreement already in place.
Rather, the candidate should be advised that the organization wants to make an offer of employment to her pursuant to terms and conditions set out in a detailed agreement. That agreement should either be handed to the individual, if she is meeting in person, or sent to the individual for her review.
She should be provided with sufficient time to review the offer and seek legal advice if she chooses, and also be told that in order to accept employment, she must sign the agreement. It is only once that has taken place that hiring should be confirmed. Otherwise, while the employer may have a signed agreement in its file, it may not be worth the paper it is printed upon.
This case is also a lesson for employees. While Mr. Buaron was ultimately successful, there are innumerable situations with similar facts where the company takes the position that it is entitled to rely upon the termination clause in the written agreement, and the individual is faced with potentially lengthy, costly and risky legal action if he wants to pursue his rights.
As a result, individuals should always seek legal advice before they sign an employment agreement, and should not feel pressured to do so. At the same time, if you have signed an employment agreement, it may not be legally binding. Again, an employment lawyer can provide advice in that context.
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Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw
. He can be reached at firstname.lastname@example.org