Signing of contract not just a formality

To best protect your organization, the contract should be used in the hiring process

Stuart Rudner

By Stuart Rudner

In teaching "Advanced HR Law for HR Professionals," one of the issues that arose repeatedly was the need to ensure written contracts of employment are designed in a manner that will make them enforceable. Unfortunately, most organizations get this wrong.    

You must start with the fundamental nature of a contract, which is that both parties will receive some sort of benefit or "consideration" from the other. As my contract law professor used to explain, if you were to walk into class one day and offer a student $1 million for her T-shirt, and the student were to accept, that would be a contract — albeit an ill-advised one — since both parties were receiving something of value.

Conversely, if the professor said, "I'm going to give you $1 million" and the student were to accept, that would not constitute a binding contract since there was no consideration flowing to the professor. It would be, as he described it, a "gratuitous promise."

In the context of the employment relationship, written contracts of employment are generally put in place for the benefit of the employer. As a result, there will generally not be any question the employer is receiving something of value. However, the issue will be whether the employee received consideration.

If the parties are in the interview or application stage and the organization offers employment to the individual on the terms and conditions set out in the contract, then there will be consideration flowing both ways since the individual would not have a job if he did not accept.

However, many organizations only have the individual sign the employment contract after a verbal agreement is entered into. In some cases, the contract is sent to the individual a few days before her start date and she is asked to bring it with her when she shows up for her first day of work. In others, it is presented to the employee on his first day of work or even weeks or months thereafter. At that point, the individual already has a job and is typically not receiving any new benefit by signing the contract. As a result, if challenged, the contract is likely to be found unenforceable.

Many individuals and organizations are of the view that timing is the only factor, and they only need to show that the contract was signed a certain amount of time before the individual started working. While that can be persuasive, the real issue is whether there was already an existing agreement, whether it was verbal or in writing.

I say in writing since, in many instances, individuals are given an offer letter that sets out key terms and conditions of their employment. They accept employment based upon the terms and conditions in that offer letter, and are subsequently presented with a written contract of employment that is designed for the sole benefit of the employer. In such circumstances, the employment contract will generally be unenforceable.

It is obvious that if an individual signs the employment agreement on the day she starts work, then there must have been a verbal agreement before. Otherwise, why would the individual have arrived for work? It is certainly helpful to show that the contract was signed weeks in advance, but even that does not entirely disprove the suggestion that there was already a verbal agreement in place. Conversely, even a short period of time between the signing of the contract and starting work can be perfectly defensible if it can be shown the parties agreed upon the terms and conditions and agreed that the individual would start work shortly thereafter.

My recommendation remains as discussed many times in the past (for example, see here and here): When an organization has decided to make an offer of employment, it should present the written contract. This can be done face-to-face or by email. Either way, the message is the same: "We have decided to make an offer of employment to you, and all of the terms and conditions are set out in this employment contract.

Prior to that, while there may be some discussion of key issues such as compensation, there should be no agreement that the individual will work for the organization, and certainly no confirmation of a start date. Likewise, until the contract is signed, the organization should not announce the hiring or take steps to onboard the individual. In other words, there is no agreement until the contract is signed. Otherwise, the contract becomes meaningless in most cases.

Of course, it is always possible for an employer to implement a new contract for existing employees. However, it is not as simple as putting a new contract in front of the employee and having him sign it. For a more thorough discussion of this issue, see my previous blog post.

Unfortunately, many organizations persist in hiring employees and then treating the signing of the contract as a formality to be taken care of later. To best protect your organization, the contract should be used in the hiring process and there should be no agreement that the individual will become an employee until that contract is signed.

For individuals, it is important to remember that contracts of employment are very important documents that can have dramatic impacts upon your rights and obligations in the future. They should never be signed without a thorough understanding of their meaning, and without proper advice from a lawyer who specializes in employment law. Many organizations have become quite aggressive in recent years, and are routinely using employment contracts with particularly harsh terms. It is critical that an individual understands what she is signing before she does so.

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