Determining consideration for new position and new contract
Question: If an employee is required to sign a new employment contract that introduces a new severance clause and changes other elements in order to get a promotion, is the new position enough to justify the changes?
Answer: The short answer to this question is yes, as long as the promotion is in exchange of a valid contract.
As a starting point, in order to create a binding contract, there must be consideration — that is, both parties must receive something of value in exchange for their promise of performance of their duties or obligations under the contract. Without consideration flowing both ways, what you have is a gratuitous promise, not a contract.
The opportunity to have a job is an obvious form of consideration. Once an employee already has the job, it is difficult for the employer to demonstrate that the employee received fresh consideration for agreeing to the terms and conditions in the written agreement. Fresh consideration may be given if the employer provides some new benefits, such as a promotion, a one-time payment, salary increase, or additional vacation time or benefits.
The promotion should be conditional upon the employee’s execution of the new agreement. The order in which events unfold is significant. For example, if the employee is asked to sign a new employment contract after she has already received the promotion, there may be a lack of fresh consideration and the contract may not be binding. Similarly, if the employee was going to receive the promotion anyways, the employment contract may not be binding due to lack of sufficient consideration.
Employers need to remember that the issue is not whether the employee signs, but rather, whether the contract would be legally enforceable. Usually this becomes an issue at the time of termination, when on the one hand, the employer will purport to rely upon the termination or severance clause, and on the other hand, the employee or her lawyer will take the position that the contract is unenforceable due to a lack of proper consideration given at the time of signing.
Employers should also be careful when drafting employment contracts to ensure that the terms, such as the severance clause, are enforceable. As well, employers would be well-advised to provide employees with a reasonable amount of time during which they can review the contract and obtain independent legal advice, if they wish to do so.
As of Sept. 1, Stuart Rudner and his team will be part of Rudner Law, an employment law firm in Markham, Ont. He is the author of You’re Fired: Just Cause for Dismissal in Canada published by Carswell, a Thomson Reuters business. He can be reached at [email protected] or 416-864-8500. This article was co-written by Nadia Zaman, an associate with Rudner Law.