Economic concerns delayed promised raise
Question: If a company tells its employees they will receive a raise on a certain date but there's a delay, do the raises have to be retroactive to the originally planned date? If it told employees the raises would be retroactive, can the company change its mind due to economic reasons?
Answer: The promised raise would be enforceable if the raise was clearly an express or implied part of the employees’ compensation package — a term of their existing employment contracts as opposed to an attempted variation of that contract. A contractual term might be found if, for example, annual raises were promised at the time of employment or if the raise was offered as an inducement for the employees to continue their employment. The promised raise would also be enforceable if it was mandated by legislation, such as to bring wages in line with the minimum wage.
However, if the raise was merely a gratuitous offer by the employer, it is less likely it would be enforceable.
Under traditional contract law, where one party to an existing contract makes a gratuitous promise and the other party provides no value or consideration, it does not have contractual force. Accordingly, if the employees did nothing in return for the employer’s promise but what they were already required to do under their employment contracts, the employer could not be compelled to make good on the promised raise. The company would be free to withdraw its promise of retroactivity and could, in fact, dispense with the discretionary raise entirely for economic — or any other — reasons.
The strict requirement for consideration was relaxed in favour of “practical consideration” in the English decision in Williams v. Roffey Bros & Nicholls (Contractors) Ltd., where a carpenter was engaged to work as a subcontractor in a refurbishing project but later refused to complete his work after determining he could not do so profitably. The contractor offered a higher fee if the carpenter continued with his obligations under the original contract. The carpenter agreed but the contractor went into arrears and the carpenter again ceased work. He successfully sued for the amount owing to him at the promised higher rate, even though he had done nothing more that he had been required to do under the original contract.
It was held the contractor had acquired a practical benefit from his voluntary promise. Without the carpenter, he would have been forced to find a new tradesman and would likely have been exposed to a stiff penalty under his own contract with the building owner.
The New Brunswick Court of Appeal in Greater Fredericton Airport Authority Inc. v. NAV Canada found valid policy reasons to support an “incremental” modernization of the traditional contract rules. The court found a variation without consideration could be enforced as long as it was not procured through economic duress. However, in this case, NAV Canada had implicitly threatened to refuse performance of its obligations if the variation was not granted. The airport was left with no practical alternative but to agree, but expressly under protest. Accordingly, the court refused to enforce the variation.
Greater Fredericton Airport provides a basis for argument that the promised raise and its retroactivity should be enforceable, but its application is by no means certain.
In some instances, a strict application of contract law has been circumvented by the doctrine of promissory estoppel. This doctrine precludes a promiser from denying a promise intended to be relied upon and that has been relied upon by the promisee to take some action or refrain from taking some action to his detriment. Promissory estoppel is dependent upon the facts of the individual case but, on a strict application, it would not likely support recovery of the promised raise. It is typically (although not universally) held that estoppel cannot be used as a “sword” to compel performance but only as a “shield” to defend against an action or demand inconsistent with the promise. Proof of detrimental reliance is also typically demanded before an estoppel will be found. On the facts described here, it seems unlikely promissory estoppel could be effectively relied on to enforce the employer’s promise.
The promised raise would only clearly be enforceable if a contractual or statutory basis for recovery could be established. In the absence of some indication the employer gained some practical advantage from the promise, it would likely be an uphill battle.
For more information see:
•Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All E.R. 512 (Eng. C.A.).
•Greater Fredericton Airport Authority Inc. v. NAV Canada, 2008 CarswellNB 147 (N.B. C.A.).
Tim Mitchell is a partner with Armstrong Management Lawyers in Calgary who practices employment and labour law. He can be reached at [email protected].
