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New contracts for old employees

Employers can ask existing workers to sign agreements, but there needs to be ‘consideration’ – the worker has to get something in return

By Stuart Rudner

I often work with employers that have heeded my advice to have employment contracts with termination clauses for all employees. Once they get the contracts set up, they want to go back and get existing employees to sign them as well.

What employers often ask is whether they can impose a new employment contract, in place of the existing verbal one, without providing notice or consideration? As I have discussed here and here, such a change will usually require one or the other.

A basic premise of contract law is that all contracts require consideration to flow from each party to the other — each side must give and receive 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. But, "I will give you $1 million for your car" is a contract, though it may be an unwise bargain. 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.

Since the existing verbal agreement includes a number of implied terms, including the right to reasonable notice of termination, the employee would be giving up that right if the new contract was accepted.

But the question a court will ask is whether the worker received any consideration in exchange for doing so. In the United States, continued employment is generally considered to be consideration. That is not the case in Canada, with certain exceptions. Unless some new benefit was given to the employee in exchange for her agreement, the new contract would not be enforceable.

The Ontario Court of Appeal`s decision in Wronko v. Western Inventory Service Ltd. may have unfortunately muddied the waters, suggesting that when an employer attempts to impose a unilateral amendment to a fundamental term of a contract of employment, one potential scenario is that:

“The employee may accept the change in the terms of employment, either expressly or implicitly through apparent acquiescence, in which case the employment will continue under the altered terms.”

This suggests a new binding contract could be created without notice or consideration, which would be contrary to the previously established and understood law. However, the subsequent decision in Fasullo v. Investments Hardware Ltd. addressed this apparent confusion and concluded as follows:

“I have concluded that the reasoning of the Court of Appeal in Wronko is not applicable on the facts here. In Wronko, the court made no mention of any lack of consideration flowing from the employer at the time it sought the amendment. It appears that in that case the court was satisfied that adequate consideration had been provided for the amendments being sought at the time the employee agreed to them.”

As a result, we seem to be back to the situation employment lawyers have understood for years: If an employer wants to impose new terms and conditions that are less advantageous to the employee than the existing ones, it will have to offer some form of consideration or an appropriate period of notice.

The other issue that often arises is whether there is some minimum amount of consideration required. In other words, would it be sufficient to offer $1 in exchange for the employee's agreement? Unfortunately, there is no clear law on the issue. The courts have said the consideration must be "valuable" or "of value," but have not defined those terms. A number of years ago, I chaired a panel of judges discussing various employment law issues and I asked them whether they would insist upon some minimum value in this context. The all agreed they would, and laughed when I suggested a loonie or a toonie — but could not give me a specific minimum value.

In many cases, I have worked with employers that have offered amounts equivalent to one week’s salary, additional vacation time or a new and improved benefits package. Of course, the ideal time to introduce a new contract would be when the employee is going to be offered a promotion or a discretionary raise or bonus. The employer can then make the promotion, raise or bonus conditional upon the employee's execution of the new agreement.

Courts will enforce termination clauses, including those that restrict the employee to the absolute statutory minimum amount of notice. However, they will consider any potential attack on the clause, as they are often sympathetic to an individual that may not have fully understood the ramifications of the contract at the time it was signed.

On that point, it is always advisable for the employer to provide employees with a reasonable amount of time to review the contract, consider its implications and obtain legal advice if they choose. It is not something to celebrate if the employee takes the contract from you and signs it immediately without giving it any thought.

Stuart Rudner is an HR lawyer and a founding partner of Rudner MacDonald LLP, a Toronto-based firm specializing in Canadian 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 srudner@rudnermacdonald.com. You can also follow him on Twitter @CanadianHRLaw and join his Canadian HR Law Group on LinkedIn.

Stuart Rudner

Stuart Rudner, Employment Lawyer and MediatorStuart Rudner is the founder of Rudner Law (RudnerLaw.ca), a firm specializing in employment law and alternative dispute resolution. He is a senior employment lawyer, mediator and arbitrator. He can be reached at stuart@rudnerlaw.ca, (416) 864-8500 or (905) 209-6999, and you can follow on Twitter @RudnerLaw.
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