What to offer an employee when making changes to contract
Question: If an employee is asked to sign a new employment contract with some changes (such as termination provisions), what would be typical considerations to be offered to the employee? Is consideration required if the employee hasn’t officially started work yet?
Answer: This question raises a very important issue. In order to have a legally binding contract, both parties must receive some form of consideration. Back when I was in law school, our professor used to explain this through a fairly simple demonstration. First, he would pick one of the students, and offer them $100 in exchange for his T-shirt. When the student accepted, he proclaimed that there was a binding contract in place, as both parties were receiving some benefit from the arrangement. By way of contrast, he would pick another student and say “I’m in a good mood, and I’m going to give you $100.” Although the student accepted, our professor explained that this was not a binding contract, but simply a “gratuitous promise.” That is because although the student was going to receive $100, the professor was not receiving any consideration for his agreement.
In the employment context, the consideration offered to an employee at the outset of the relationship is usually the offer of employment. Once an offer has been made and accepted, an employer must provide some new form of consideration in order to alter the arrangement.
Unfortunately, it is not unusual for employers to meet with candidates and, once they have selected their first choice, engage in a negotiation over the key terms, such as position, compensation and the like, and then reach an agreement and choose a starting date. At that time, the parties have a verbal agreement, which will be supplemented by many terms implied by law (such as the duty to provide reasonable notice of dismissal).
Many employers then have the new employee sign a much more detailed contract, which is for the benefit of the employer, when they start work. At that time, it’s too late; there is already a binding agreement in place, and in order to replace it with a new agreement, both parties must receive some sort of consideration. This is absolutely true even if the employee has not “officially” started work yet. If she can show that there was a binding agreement, which can be verbal or written, then the employer cannot simply put a new agreement in place.
With respect to “typical consideration,” there is no simple answer. Our courts have been clear in saying that consideration must be “something of value.” However, that is deliberately vague. I often recommend that employers attempt to put new contracts in place when they offer a promotion or pay raise, or a non-automatic bonus. They can also offer a one-time signing bonus, new benefits, or anything else that has a real value. However, the consideration must be something that the employee would not otherwise have received, such as an automatic annual pay raise.
