'Consideration can be something relatively small. It could also be something quite generous,' says lawyer looking at recent case in Ontario
One of the biggest mistakes employers make when updating employment contracts is failing to offer legitimate fresh consideration – even though the bar for consideration to be enforceable is quite low.
A recent decision by the Ontario Court of Appeal is good news for employers, however, as it affirms once again that when it comes to the enforcement of amended employment contracts, “courts are concerned with the existence, rather than the adequacy, of consideration.”
In Giacomodonato v. PearTree Securities Inc., the court upheld a trial judge’s 2023 ruling that awarded former PearTree president and co-head of banking, David Donato, damages based on a second version of an employment contract.
In his arguments, Donato claimed the power imbalance between employer and employee, as well as the “overall advantages and disadvantages” of the two contracts warranted a second look.
The court disregarded these claims, based on Donato’s position at the company which gave him privileges such as “access to information about PearTree’s operations; his experience in negotiating contracts; and his representation by counsel through the negotiation of the terms of the second contract, which lasted over a month.”
Common mistakes with fresh consideration
One of the central issues in the case was whether the second employment contract was enforceable, particularly in relation to termination. The court found that the second contract was valid because PearTree had provided fresh consideration in the form of a $40,000 payment to cover Donato's exit from his previous employer and additional vacation time.
“Consideration can be something relatively small. It could also be something quite generous. What it can't be is something that they would have normally got in the usual course of their employment,” says Lai-King Hum of Hum Law.
“What I've seen sometimes is employers will say, ‘Well, we're giving out raises to everyone, like we do every year, but this year, we're going to give them a new contract to sign before they get their rate.’ And that's a trap that employers could fall into, because that would not be considered fresh consideration.”
Fresh consideration is crucial when updating or renegotiating contracts, Hum explains. This means employers can’t simply rely on previously agreed-upon benefits or routine raises; employers have flexibility in what they offer, but the offer must be distinct from standard entitlements.
How fresh consideration impacts termination clauses
Many employers seek to update employment contracts to revise or clarify termination clauses, especially in response to new legal precedents. However, as the PearTree decision shows, such updates must be made with care, as employers risk owing far more in termination payments if the updated clauses do not comply with the Employment Standards Act (ESA).
“What is happening a lot is employers, their lawyers tell them about these cases that are in court that say, if you have these kinds of termination clauses, then they’re not enforceable,” says Hum.
“They scrutinize very carefully the termination clauses, and unless they're clearly written in a way that complies with the employment standards, courts have found them not to be enforceable, so the termination clauses that violate the ESA, [that] breach the minimum terms, are considered not enforceable, and then the employee would be entitled to common law, reasonable notice.”
In Giacomodonato v. PearTree, the difference between statutory and common law entitlements was significant, with Donato’s common law notice entitlement potentially four times higher than what he would have received under the ESA.
To avoid such costly mistakes, employers should ensure that any updates to termination clauses are not only backed by fresh consideration but are ESA compliant.
“Someone who's been there for two years under the ESA would be entitled to two weeks. And under the common law, depending on their position, it could be anywhere between two months and six months,” Hum adds.
Non-monetary fresh consideration options
For employers looking to update contracts but unsure about offering financial compensation, there are non-monetary alternatives that can serve as fresh consideration. As the court outlined in this decision:
“As long as there is some consideration for the amendments to the contract, the court leaves it to the parties to form their own judgment over its adequacy and to make their own bargain. The law does not require that the new benefits be in the form of money, or that the economic value of the new benefits provided to the employee equal or exceed the economic cost of the new terms of the agreement.”
Hum suggests several options that could provide value to employees without direct monetary compensation.
"It could be anything. It really depends on the workplace,” Hum says. “Maybe there's flexibility in terms of hours, or flexibility in terms of work versus home."
However, it’s essential that these benefits are distinct from what employees are already entitled to receive. Employers must ensure that any updates to employment contracts are properly supported by fresh consideration that are distinctly offered and accepted by the employee.
