Contracts prevent employers from getting burned in hot markets

Poorly drafted agreements provide no protection for employer

In hot labour markets, employment contracts have a valuable role to play in protecting employers from the pitfalls that can come with a weaker negotiating position.

However, if poorly drafted or improperly implemented, written agreements will provide none of the protections the employer seeks and may actually increase its financial exposure.

Due to the historic inequality of bargaining power between employers and employees, courts will carefully review all factors to ensure an employee’s rights are protected.

Duress, undue influence and unconscionability in contractual relationships are scrutinized with particular care as they relate to employees. If a court finds an employee did not consent to the terms of an agreement or faced a threat of losing her job if she didn’t agree to revised terms, it may invalidate all or part of the agreement. To protect against claims of this type, the employer should ensure employees have an opportunity to obtain independent legal advice before signing agreements.

There are additional considerations to ensure the employment contract will be upheld:

Offer and acceptance: There must be a clear offer and acceptance of the employment relationship. If an employee begins work, then later signs the written employment agreement, the employee may only be bound by the oral and implied common law terms of employment and not by the written terms of the contract. To avoid this, an offer of employment could be conditional upon the signing of a written agreement. The best practice is to attach a copy of the written contract to the offer letter and allow sufficient time for consideration.

Consideration: Consideration is essentially a mutual promise or obligation between the parties. Contracts made without consideration will not be enforced by the courts.

To ensure a contract is enforceable based on adequate consideration, an employer should introduce new written terms at the same time as a payment, raise or promotion, or provide reasonable notice to employees and obtain employee buy-in, prior to forcing a written employment agreement upon them.

Avoiding liability for misrepresentation: Employees are allowed to recover damages for negligent or intentional misrepresentation whether or not a written employment contract is in place.

In Queen v Cognos Inc., the Supreme Court of Canada suggested a cause of action in negligent or intentional misrepresentation may be avoided by a carefully worded contractual agreement. The employer should clearly outline in written form the job and terms and conditions of employment.

Avoiding constructive dismissal: Employers often attempt to carefully define an employee’s role and responsibilities in the contract to provide more certainty. However, this is not in the employer’s best interest if the employment relationship is to continue beyond a certain defined task or term.

Contracts that specifically define tasks and responsibilities can be rendered unenforceable by circumstances such as a promotion, reassignment, change in responsibilities, request to perform additional duties or a change in geographic location. A carefully worded employment contract can cover a change in position or duties, minimizing the risk of a constructive dismissal suit.

Bonuses: An ambiguous bonus clause can result in employees being entitled to bonuses even after they have resigned or been terminated. Recent case law has also shown employers may be liable to pay pro-rated shares of yearly bonuses in the absence of provisions that clearly state otherwise.

The British Columbia Court of Appeal in Hannan v Methanex Corp. ruled an agreement did not require an employee to still be with his employer at the end of the year as a condition to receiving a bonus. The court held once the target performance levels were complete, the incentive reward was payable and not discretionary.

Similar considerations must be given to the wording of stock options, otherwise employers could be liable for the continuance of stock options or damages for loss of stock options following termination. Again, liability can be prevented through a clearly drafted employment agreement.

Non-competition provisions: It is important for employers to protect proprietary information during and after employment. This is particularly true in a hot labour market because high demand for workers can see an employee end up with a competitor.

Common law provides some protection in the form of duties of fidelity and confidentiality and the fiduciary relationship for high-level employees. However, the enforcement of these duties can be cumbersome, expensive and only a blunt instrument compared with the precision available to an employer through the use of carefully drafted non-solicitation or non-competition clauses in an employment agreement.

David Corry is a partner specializing in labour and employment law at Gowling Lafleur Henderson LLP in Calgary. He can be reached at (403) 298-1812 or [email protected].



Tips for employers

Drafting employment contracts

In addition to the usual precautions, the following are some practical considerations and recommendations for drafting written employment contracts in a hot labour market:

•Ensure any bonuses are not payable in the event the employee resigns, is dismissed for just cause or alleges constructive dismissal.

•Provide additional payments on a monthly basis for the duration of non-competition or non-solicitation provisions. That way, if the employee challenges them, she is obligated to repay any amounts received in consideration of these clauses.

•Consider fair and reasonable severance provisions. However, in a hot labour market, severance provisions should not provide a windfall to the employee. If the severance provisions are too generous, the employee could allege constructive dismissal or encourage the employer to dismiss her in order to obtain the benefit of the severance.

•Include an arbitration clause for the resolution of any disputes. There is a greater likelihood of preserving the employment relationship where disputes are resolved in a quick and confidential way through an arbitration clause than if the parties have to resort to the courts.

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