Amending contracts of existing staff

Employer must provide something beyond continued employment

Background

All contracts are comprised of three elements. There must be an offer by one party, an acceptance of the offer by the other party and some consideration that passes between the two parties. Without these three elements a legally binding contractual arrangement is not formed.

It is not uncommon for an employer to decide it wants to amend the terms and conditions of employment for existing employees. Such amendments may involve instituting a written contract (where the employees had no written contact previously), instituting a non-competition or non-solicitation agreement, instituting an ownership of inventions agreement or any other agreement that seeks to clarify or amend the rights and obligations of the parties to the employment relationship.

Typically, when an employer proposes such an amendment to the existing relationship, the employee is asked to give up some existing right or to take on some type of new restriction. Where these types of agreements are entered into with existing employees the agreement will only be enforceable when the employee has been provided with some new consideration for the agreement.

The case: Kohler Canada Co. v. Porter

The Ontario Superior Court’s decision in Kohler Canada Co. v. Porter (2002), 17 C.C.E.L. (3d) 274, examined the enforceability of a non-competition provision the Kohler Canada Co. imposed on Porter.

Porter began working for Kohler in 1988 as a customer service representative. Over the years he rose in seniority and in 1999 became the sales manager for Central and Western Canada. He was responsible for supervising a staff of 10 and managed the relationships with Kohler’s wholesale distributors, dealers and contractors.

Before 2001 Porter had never been asked to sign an employment agreement. In 2001, without any advance warning or discussion, Kohler presented Porter with an employment agreement and asked him to sign it. Porter did not ask for, or receive, any explanation or any opportunity to seek independent legal advice. Porter signed and returned it believing it was a routine document.

The key provision of the employment agreement stated Porter was not to work anywhere in North America for a period of one year after termination of employment in a line of business which was competitive to Kohler’s business. The employment agreement also stated the consideration for the agreement is the employee’s “employment status with Kohler and the payment of salary during such employment.”

In January 2002 Porter was offered a position as Canadian regional sales manager for Mansfield, one of Kohler’s competitors. He provided Kohler with three-weeks’ notice that he would be leaving. Kohler told Porter he did not need to work out the notice period with Kohler and Porter started working for Mansfield on Feb. 1, 2002.

Kohler started a proceeding seeking an injunction restraining Porter from working for Mansfield shortly after. Kohler alleged Porter was in breach of his non-competition obligations under his contract of employment. Porter took the position the non-competition clause was unenforceable because it was overly broad in geographic scope and went beyond what was necessary to protect Kohler’s legitimate business interests. In addition Porter argued there was no consideration given for the employment agreement and it was therefore not binding.

In deciding whether to grant the injunction, the court started with the general rule that non-competition clauses in employment contracts are generally void and would only be enforced in exceptional cases where a non-solicitation clause would not suffice to protect the legitimate business interests of the employer. The court also took note of the devastating impact on an employee if the ability to work and earn a living is restrained.

The court noted the breadth of the non-competition provision was far too wide in that it sought to restrain Porter from working in a competitive business in all of North America. Since he only worked for Kohler in Central and Western Canada the clause should not have tried to restrain him from working anywhere on the continent. More importantly the court held a non-competition covenant went beyond what was necessary to protect Kohler’s legitimate business interests. The type of information Porter possessed could have been adequately protected with a combination of a non-solicitation clause and a confidential information provision.

Regardless of the reasonableness, or lack thereof, of the non-competition provision, the court ultimately concluded the agreement was not enforceable because Porter had not received any new consideration for signing the agreement. In coming to this conclusion the court stated continued employment, without anything more of value passing to an existing employee, is not consideration for a new promise which is disadvantageous to the employee.

Continued employment could not be new or additional consideration since continued employment was something the employer had already agreed to provide prior to the new agreement. Nothing new had passed to the employee.

In coming to this conclusion, the court contrasted the fact situation in Porter with the fact situation in Techform Products Ltd. v. Wolda (see “Case of note” below).

In Techform it was made clear to the employee that if he did not sign the new agreement he would be terminated in accordance with the terms of his existing contractual arrangement.

The court in Techform held since it was clear the employee would be fired if the agreement was not signed and there was at least an implicit promise by the employer it would not exercise its right to terminate in the reasonable future, the employee had received some new consideration in exchange for the new agreement. The new consideration was the agreement not to terminate the employee.

In Porter the stated consideration in the employment contract was “continued employment status with Kohler and the payment of salary during such employment.” This was something Porter was already entitled to under the existing employment relationship. There was no evidence Porter believed he would be fired if he did not sign the agreement.

There was no evidence Kohler threatened termination if Porter did not sign. There was also no evidence Kohler agreed to forebear on a prior or present intention to terminate Porter’s employment. Most importantly, the court noted, Kohler would not have been entitled to summarily dismiss Porter for failing to sign the employment agreement. Having been an employee for about 13 years, the court surmised he would have been entitled to reasonable notice in the neighbourhood of 12 months.

Therefore if Kohler wished to terminate Porter for failing to agree to sign the agreement it would have had to provide him with reasonable notice of termination. In the result there was no consideration for the agreement and it was therefore unenforceable against Porter.

The court refused to grant Kohler’s request for an injunction restraining Porter from working for Mansfield.

Tips for employers

When attempting to institute a new employment contract or a non-competition/non-solicitation agreement with existing employees consider the following tips:

•Provide the employee with a copy of the proposed agreement and allow the employee sufficient time to review it and obtain independent legal advice prior to signing. You may even wish to recommend the employee obtain independent legal advice.

•If you feel strongly all employees must be subject to the proposed agreement on a go-forward basis, you can chose to advise them that if they fail to sign the agreement, their employment will be terminated with payment of reasonable notice as required by law. An employer is within its contractual rights to do this. If possible an employer may want to provide working notice rather than pay in lieu of notice.

•Try to introduce the new agreement at a time when the terms of employment are going to change. That way you can use the change in employment terms (such as a promotion, or increase in remuneration and benefits) as consideration for the new agreement. Therefore, the employee has received value for having signed an agreement that somehow restricts the employee’s future rights.

•Obtain legal advice both in respect of the contents of the proposed new agreement and the method of implementation. Implementing a new agreement with existing employees is very tricky. Both legal and staff morale issues should be considered.

Case of note

Techform Products Ltd. v. Wolda (2001)12 C.C.E.L. (3d) 184 (Ont. C.A.) In this case the Ontario Court of Appeal found continued employment coupled with implied forbearance from dismissal for a reasonable period of time was sufficient consideration for an inventions agreement.

Wolda had invented the “boxless hinge” on his own time and without Techform’s knowledge. He presented the invention and Techform presented Wolda with an employment technology agreement which assigned to Techform the rights to any inventions he conceived while working as a contractor for Techform.

The consideration mentioned in the agreement was Wolda’s continued relationship with Techform. Wolda claimed he signed the agreement because he believed he had to or he would have been let go. His superior testified that had Wolda refused to sign, Techform would have given him 60-days’ notice of termination as permitted by the terms of his consulting agreement.

In 1996 Wolda invented the “3D hinge” on Techform’s time and with their assistance. He then requested an increase in his hourly rate and that a donation be made to charity in exchange for assigning his rights to the hinge. Techform, angered by these demands, terminated his contract and sued for a declaration that it was the owner of the hinge.

Wolda argued the technology agreement was not enforceable as there had been no consideration for it. The appeal court held continued employment and implied forbearance from dismissal for a reasonable period of time was adequate consideration. The court accepted that if Wolda had not signed the agreement, Techform would have simply terminated the relationship in accordance with it rights under the consultancy agreement.

This in-depth look at employment contracts was provided by Chris Foulon, an employment law lawyer with Goodman and Carr LLP in Toronto and Goodman and Carr editor of CELT. He can be reached at (416) 597-4088 or cfoulon@goodmancarr.com.

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