First Reference company logo

First Reference Talks

News and Discussions on Payroll, HR & Employment Law

decorative image

Contract or gratuitous promise: the need for consideration

employee-termination-contract-probationEmployment lawyers spend a lot of time assessing whether contracts of employment are enforceable or not. The first thing that I check, when I review a contract of employment, is the date. What I’m attempting to determine is whether the contract was signed before or after there was already a verbal agreement in place. In many cases, the employee’s starting date, and the date that they executed the contract, are one and the same. That is pretty telling, since most people would not have shown up for work unless some sort of agreement had already been reached. When explaining these concepts, lawyers often refer to “consideration” as being a requirement of a valid contract.

As my Contracts professor used to explain to our first year law school class, the difference between a binding contract and a gratuitous promise is the existence, or lack of, consideration. One example that he used was walking into class, admiring a student’s shirt, and offering them $1,000,000 for it. If the student accepted the offer, then a binding contract would exist, since both parties would be receiving consideration (a benefit) from the other. Conversely, if our professor simply walked into the room and offered to give one of the students $1,000,000, and the student accepted, that would not be a contract, but a gratuitous promise. The difference is that the professor would not be receiving anything in exchange for payment.

How does this relate to employment law? The principle of consideration applies, like any other contract. The fundamental basis of any employment contract is that the employee will work, and the employer will pay them. Unfortunately, the typical recruiting process involves a number of interviews, during which there may be some discussion about key terms of the relationship, such as what the salary expectations would be, weeks of vacation, and location of employment. At some point, the representative of the employer is likely to advise the candidate that they have been selected, confirm salary and other core terms of the agreement, and propose a start date. If the employee accepts, then a verbal agreement has been entered into. By law, that agreement includes all of the terms that were explicitly discussed, as well as many others that will be implied by law (both employment standards legislation and common law). Among them is the obligation of the employer to provide reasonable notice of dismissal unless there is just cause.

In many cases, the employer will subsequently send a written contract of employment to the new employee, or will hand it to them on their first day of work and ask them to sign. The written contract will contain many terms and conditions that were not discussed, all of which will be to the benefit of the employer. One of them will typically be a termination clause that will purport to remove the employee’s entitlement to reasonable notice at common law and replace it with some more limited entitlement, sometimes as minimal as the employment standards minimum requirements.

If the parties enter into such an agreement, the employer will clearly be receiving a benefit, since the employee will have agreed to a number of terms and conditions that benefit the employer. However, what is the employee receiving in exchange? In the typical scenario, they will already have agreed to their position, duties, and various forms of compensation and benefits. They will not be receiving anything new pursuant to the written contract. In other words, they did not receive any consideration, and most employment lawyers and courts would find that the written contract of employment is unenforceable.

This seems to drive employers crazy. Many cannot understand why such a contract is unenforceable. In fact, many can’t understand why they can’t “fire” the employee if they refuse to sign the new contract. As I have explained to many employers, the situation would be tantamount to them negotiating to rent space for their business, agreeing upon a five-year lease at $20 per square foot, only to arrive on the first day of the lease and have the landlord ask them to sign a far more detailed lease agreement in which they agree to the following:

  1. they will be responsible for the costs of all leasehold improvements;
  2. the landlord will be entitled to terminate the lease on seven days notice;
  3. the landlord will be entitled to charge extra for any electricity and water usage outside of regular business hours.

Another analogy I often use with employers is that they would not negotiate an agreement with a supplier, only to insist that the supplier sign a written contract, with additional terms and conditions, at the start of, or a few months into, the relationship. So why do they think that it is perfectly acceptable to introduce a new contract to someone they have already hired?

One related issue that often arises is the assumption, on the part of the employers, that if the employee does agree to sign the new contract, then they will be held to its terms. In some situations, I have advised employers not to introduce a new contract, due to the fact that the employee was not receiving any consideration, and the employer subsequently bragged that the employee signed off anyway, so all was good. As I explained, the issue is not whether the employee signs, but whether a court will enforce the contract down the road. Typically, this will not be an issue until the time of termination, when the employer will purport to rely upon the termination clause and the employee, or their lawyer, will take the position that the contract is unenforceable due to a lack of consideration.

The bottom line is that the requirement for consideration is a fundamental aspect of the law of contract. Rather than putting themselves in a precarious situation where contracts of employment that they have spent time and money preparing may not be worth the paper that they are written on, employers can easily avoid such a result by entering into a contract of employment properly. Instead of making an offer, having it accepted, and then attempting to put a written contract in place, our firm trains its clients on the proper way to enter into a contract. Once the candidate has been selected, they should be advised that the organization intends to make an offer of employment to them based upon the terms and conditions set out in a written agreement. They should then provide that agreement to the candidate and provide them with a reasonable amount of time to review the offer, consider it and seek any professional advice that they choose. In the meantime, while there may be a proposed start date, the parties should not proceed on the assumption that the individual will become an employee. As I have explained to many employers, it is hard to argue that the contract was only entered into on April 1 when the hiring was announced in a company-wide email on March 15. It is only once the employee has accepted the terms and conditions that a contract is in place and the parties should begin preparation for the employee’s first day.

I recognize that in some cases, the need to hire is urgent and time may be limited. That said, in the vast majority of cases there will be sufficient time to hire an employee properly and avoid the risk that the employment agreement that the employer wants to have in place will be unenforceable. Consideration is the key. The most obvious form of consideration is the opportunity to have a job; once it is clear that the employee already had a job, it becomes very difficult for the employer to demonstrate that the employee received some new consideration for agreeing to the terms and conditions in the written agreement. This can be done by providing some new benefit, such as a one-time payment, an increase in salary, or additional vacation time or benefits. However, in order to avoid the obligation to provide anything extra, the offer of employment itself should be conditional upon the employee accepting all of the terms and conditions that the employer wants to have in place.

Follow me

Stuart Rudner

Employment Lawyer at Rudner MacDonald LLP
Stuart Rudner is a leading HR Lawyer and a founding partner of Rudner MacDonald LLP, a firm specializing in Canadian Employment Law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is the author of You’re Fired! Just Cause for Dismissal in Canada, a textbook and database of summary dismissal cases published by Carswell. Read more
Follow me
Kindle

, , , , , , , , , , , , ,

Comments are currently closed.

One thought on “Contract or gratuitous promise: the need for consideration
  • Larry Wettlaufer says:

    Stuart, 1 of the best articles I recall reading on the topic of employment contracts!

    Recently, I have been hearing complaints from people re terms of a contract they signed on their 1st day of employment and what was originally offered so, to see your expert opinion, will give further food for thought.

    Thanks again!