Steering clear of contract landmines

The five most common mistakes employers make in employment contracts

In the past, employment relationships were most often governed by verbal agreements and handshakes. But now parties are frequently putting the terms of employment in writing to avoid uncertainty.

Employment agreements present unique challenges to HR professionals as they are only worthwhile if they are properly implemented and their terms are enforceable. Below are five common pitfalls associated with drafting and implementing employment agreements.

Assuming probationary period is implied: A common misunderstanding is that all new employees are automatically subject to a probationary period — that the term is implied into each new employment contract. This is not the case.

This provision must be clearly set out. Three months is a common probationary term, as it usually corresponds with the period of employment under most provincial employment standards legislation during which time an employee is not entitled to termination pay. But the period can be longer or shorter depending on the circumstances.

Not properly considering the effect of recruitment or inducement: In a competitive employment environment, employees frequently move from one job to another. If recruitment or inducement is not addressed in the agreement, employers may find themselves on the hook for the employee’s service with a previous employer. The employment agreement should either specify there will be no recognition of service that predates the agreement or it should fix a notice period. It is also important to include an “entire agreement” clause to make it clear that the agreement embodies the parties’ entire understanding and supersedes all prior agreements or representations.

Improper execution: Employment agreements provide an opportunity to clearly agree in advance on the notice of termination an employee will receive if there is a dismissal. In the absence of an enforceable termination clause, there is a presumption in favour of reasonable notice of termination. At law a contract is only enforceable if there is an exchange of “consideration.” Consideration is the legal term for the principle that each party to a contract must receive something in exchange for agreeing to be bound by its terms.

In the employment context, consideration flows from the employer to the employee through the promise of employment and from the employee to the employer through the promise to perform the duties of the position. However, it is not uncommon for an employee to accept a position and then be asked to execute an employment agreement afterwards. If this occurs, and the terms of the subsequent agreement are different than that which the employee agreed to when accepting the position, there is a lack of consideration because the employee has started the job and is not receiving anything additional for agreeing to be bound by the subsequent agreement.

The courts have found time and again that the mere continuation of employment, regardless of whether the employee actually executes the subsequent agreement, is insufficient consideration. Something additional must be provided. For example, if the employer agrees to “forebear” from exercising its right to terminate the employee for a reasonable period of time, thereby increasing job security for the employee, this will be sufficient. Simply telling employees to sign the agreement or be terminated is not.

How does one avoid a lack of consideration? At the outset, ensure the employee signs the employment agreement before starting work. The employee should have adequate time to both review the agreement and consult with counsel. If the employment agreement is being introduced mid-employment, offer the employee something of value that she would not ordinarily have received, such as a bonus or additional vacation time. If the employer has nothing of value to offer, provide the employee with adequate notice or pay in lieu of notice, based on age and years of service. (For more information on consideration, click on the related articles link below.)

Termination provision does not meet statutory minimums: Another common obstacle to a valid employment agreement is failure to comply with provincial employment standards minimums.

Interestingly, employment agreements that will violate employment standards legislation in the future are also unenforceable. To avoid future compliance issues, the termination clause should reference the minimums contained within a specific act and, if the employer is going to provide a fixed amount of notice or pay in lieu of notice, the clause should provide that the employee will receive the “greater of” the prescribed amount or the legislated minimums. It should avoid the use of “not less than” or “and/or” and should specifically reference “without cause.” For absolute certainty, it is recommended the clause also make it clear that the clause embodies the employee’s “full entitlement.”

Ambiguity: If the employee’s notice entitlement is at all unclear, it will be fatal to the termination clause. Even if the actual notice of termination the employee will receive is clear, if the clause is ambiguous as to what compensation the employee will receive during the notice period, debate may very well arise as to what aspects of the employee’s compensation package are payable. For example, will incentive compensation such as bonuses be payable? Bonuses and incentive compensation should be clearly explained in written policies and incorporated by reference into the employment agreement. Alternatively, the employment agreement should speak to whether bonus or incentive compensation is payable during the notice period.

Also it is common that short- and long-term disability policies are not continued beyond the statutory notice period. Therefore, the termination clause should specify that benefits will be payable “subject to the terms of the applicable policies.”

At the end of the day, a valid employment agreement is beneficial to both employees and employers as it clarifies their rights and obligations and provides certainty in the event of termination. It can also limit the potential for costly and time-consuming litigation.

David Whitten is a lawyer with the Toronto firm of Rubin Thomlinson LLP and a member of the Ontario Bar Association’s Executive for the Workers Compensation Section. He can be reached at (416) 847-1814 ext. 110 or [email protected].

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