How to (legally) get employees already on the payroll to sign a new contract of employment, and the benefit that can bring for employers
By Stuart Rudner
Employers should have every single employee sign a contract of employment — that’s one of my mantras.
There are many ways in which contracts can be used to bolster the employer’s rights and reduce its obligations, as well as reducing any uncertainty regarding the terms of the relationship. Primary among them is the ability to define the amount of notice to be provided in the event of dismissal without cause, rather than having to determine what is “reasonable” at the time of dismissal.
A question I am often asked, however, is what to do about employees already on the payroll?
In response, I often refer back to my contract law professor, who would use an example to explain the difference between a “gratuitous promise” and a contract. As he explained, if he said to one of the students, “I will give you $1 million dollars” and the student said “OK,” that would be a gratuitous promise that is not legally enforceable.
Conversely, if he said “I will give you $1 million dollars for your shirt,” and the student said “I accept,” then there would be a binding (albeit ill-advised) contract. The difference? In the second example, there is “consideration” flowing both ways: The professor gets the shirt, the student gets the cash. In order to have a valid contract, both parties must receive some sort of benefit from the other.
The reason this is relevant in the employment context is all employees have a contract of employment. Some have written contracts, while most have verbal agreements. If an employer wants to put a new written contract in place, they must offer something to the employee in exchange for their agreement to sign.
Many employers make the mistake of simply putting a contract in front of the employee (often during a performance or salary review) and telling them to sign. Sometimes they compound the error by assuring the employee it is “nothing to worry about” and simply confirms the terms of employment that already exist. That is almost never the case. Inevitably, the employer will be seeking to impose new terms and conditions. Otherwise, there would be no reason to have the new agreement in the first place.
As an aside, employers often make a similar mistake at the time of hiring. It is not uncommon for an organization to hire an individual, tell them to start work on a specific date, and then put a contract in front of them to sign when they arrive for their first day of work. At that point, there is already a verbal agreement in place.
Once there is an existing agreement, there are two ways in which an employer can establish a new written agreement. The first, and usually preferable, approach is to provide some sort of consideration. The law is clear in saying the consideration must be something of value, but otherwise ambiguous in defining what that might be. It could be an increase in compensation, a promotion, new benefits, additional vacation time or anything else of value. As I have told many clients, promotions are an excellent opportunity to put a new contract of employment in place.
Similarly, salary increases and bonuses are appropriate consideration as long as they would not have been paid regardless of whether the individual signs the new contract. If it is an automatic bonus or salary increase, it would not constitute consideration as the employer had to provide it any event.
The other way to put a new contract in place is to provide notice of the change. Effectively, what the employer is doing is providing notice the existing employment contract will terminate on a specified date in the future and be replaced by the new agreement. The amount of notice required will be equivalent to the amount of notice that would be required if the employer was going to dismiss the employee without cause. As a result, it can be substantial.
While some recent cases have resulted in a degree of uncertainty, my view is that in most circumstances, it will still be effective to provide notice in this manner. However, like most situations, employers should obtain legal advice before proceeding.
Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. 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 [email protected]. You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.
