Fresh consideration and employment contracts
When a company promotes an employee, the employer should provide the employee with a new contract to sign prior to allowing the employee to commence his or her duties. In that way, the company is providing the employee with “fresh consideration” to make the contract enforceable. Consideration is the legal word for the exchange of something of value to make contracts enforceable and in a promotion it takes the form of the increased salary that comes with the new job. If the company allows the employee to be promoted and then has the employee sign an employment contract after the promotion has already taken place, there is a chance the employee can argue the terms of the contract that were not discussed pre–promotion should not be enforced for lack of fresh consideration rendering the terms of the contract unenforceable.
Recently, the Ontario Court of Appeal addressed this issue in Holland v. Hostopia.com Inc., 2015 ONCA 762. In this case, the employee was hired pursuant to an Offer Letter which provided that he would also have to sign an Employment Contract. However, the offer letter did not state there would be a termination clause in the Employment Contract. Nine months after commencing, the company presented the employee with an Employment Contract which contained a termination clause limiting him to his Employment Standards Act, 2000 minimums in the event of termination. The employee alleged the clause was not valid for lack of fresh consideration. The Ontario Court of Appeal agreed and held the Offer Letter was a binding contract. Further, there was no evidence of any discussion on the subject of termination prior to the acceptance of the Offer Letter and no evidence the employee had agreed to waive his right to common law notice. Therefore, the termination clause in the Employment Contract was “inconsistent” with the Offer Letter and not supported by fresh consideration. The employee was entitled to his common law entitlement.
The same issue in Holland came before a Trial Judge in the recent case of Gibbons v. BB Blank Inc. 2016 CanLII 44181. In this case, the employee commenced employment in 2011 and he argued that he was promoted in May of 2012. The employee argued that only after he accepted the promotion was he presented with an employment contract which contained a termination clause. Therefore, he argued that the termination clause was not enforceable because there was no fresh consideration provided to secure it.
The Trial Judge rejected the employee’s arguments on the basis that there was no verbal “contract” in May of 2012. Rather, the company had offered a promotion in May but this was only crystalized to take effect in June when the Employee signed the contract of employment and job description. The Trial Judge held that the employee did not commence performing the new role promised by the promotion until after he signed the employment contract.
The Trial Judge summarized his conclusions as follows:
By signing the Contract on June 4, 2012 the plaintiff accepted its terms including the promotion, the salary increase, the Start Date and the Termination Clause.
It is important to note that the plaintiff had the Contract for about five days before he signed it — in fact he testified that he had it for “more than five days” and “a week and a half”. The plaintiff is university educated. In my view the plaintiff was sufficiently sophisticated and had adequate time to review, consider and understand the Contract and its contents, including the Termination Clause. I find that he had ample opportunity to ask questions of the defendant for any clarification of the Contract or to request the exclusion or variation of the Termination Clause and to seek appropriate professional advice. Nothing prevented the plaintiff from seeking legal advice regarding the Contract. He certainly had the time to do so.
In fact, all the evidence points to the Contract, his new duties and the new salary all starting on the Start Day and not prior to the Start Date as submitted by the plaintiff.
The plaintiff admitted on cross-examination that the increase in salary and his new duties did not start until his acceptance of the Contract on the Start Date. This is consistent with the terms on the Contract.
I find that the promotion and the increased salary constituted fresh consideration to make the Contract valid.
I conclude that both the Contract and the Termination Clause are enforceable and the notice given to the plaintiff on termination is in accordance with the Termination Clause. Consequently, the plaintiff is not entitled to any further notice or payment in lieu of notice as a result of the termination of his employment by the defendant.
The take-away from this case is clear:
- When promoting an employee, ensure that the employee is presented with and has time to review an employment contract before commencing his/her new role.
- Avoid sending employee’s contracts after the promotion because if this occurs the contract may be unenforceable for lack of consideration.
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