To appreciate the dangers of varying employment terms, we must start with the foundations of contract law. First, a contract requires that each party receive a benefit (consideration). Second, if the parties agree to a variation of contract, but consideration is not received by both parties, Courts will consider the new contract an “unenforceable unilateral variation”. Third, it is not normally considered a benefit to tell your employee “if you agree to this, you get to keep your job.” That is a benefit your employee was already entitled to under the original terms of employment, and therefore, does not constitute “fresh” consideration.
What happens if both parties do not receive a benefit?
A variation to a contract without fresh consideration renders the agreement invalid. Following are situations where Courts have determined that a contract has been unilaterally varied:
The employer reduced an employee’s commission rate.The Court determined that the variation was unenforceable because the employee did not receive a benefit. The employer was then ordered to pay their employee commission according to the original contract; totalling over $50,000 (Hobbs v. TDI Canada Ltd., 2004 CarswellOnt 4989).
The employer promised a new employee a two-year contract and wrote out the compensation scheme in a letter. Five months after the employee began his duties, the employer asked him to sign a more substantial contract that included a termination clause. The court determined that the initial letter was an interim contract, and that the more detailed contract was a contract variation. Because the employee did not receive a benefit for agreeing to the new termination clause, the contract was unenforceable. Thus, dismissing the employee according to the newly added termination clause constituted a wrongful dismissal (Singh v. Empire Life Insurance Co., 2002 CarswellBC 1893).
The employer asked an existing employee to take on new responsibilities, which expanded the scope of her work in a substantial way. Eventually the employee resigned due to difficulties learning the software programs required for her new role. She then claimed that she had been constructively dismissed when her employer changed the scope of her duties (without reasonable notice of the change). The Court found that the employer had repudiated the initial contract by imposing a unilateral change without consideration or notice and ordered the employer to pay damages equivalent to 10 months’ pay (Fisher v. Lakeland Mills Ltd., 2008 CarswellBC).
What is beneficial enough to be fresh consideration?
Fresh consideration requires that your employee receive an “additional advantage beyond continued employment” for agreeing to the new terms (Krieser v. Active Chemicals Ltd., 2005 CarswellBC 2241). An additional advantage is obvious where the employee receives increased benefits such as vacation pay or health benefits, increased pay, or an increased notice period prior to termination. The consideration must be real, or sufficient, in the sense that it has a legal value. The court is not, however, as concerned with the adequacy of the benefit, which is usually left up to the private parties.
A more ambiguous situation arises when an employer tries to vary the terms of employment in exchange for a promise not to terminate the employee. Generally speaking the law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and then rely on the continued employment relationship as the consideration for the variation. Only in certain instances where the employee gains increased security of employment for agreeing to the variation will such a promise be viewed as consideration (Techform Products Ltd. v. Wolda, 2001 CarswellOnt 3461).
Lessons for employers
When an employee is asked to change the scope of his or her duties, compensation, benefits or termination provisions, it must be recognized that this request could amount to a unilateral change of contract rendering the agreement unenforceable. It must also be recognized that even in employment relationships where no written contract exists, the parties are subject to an implied contract and the same principles apply as if there were a written contract.
To vary an employment contact you must ensure that both parties receive a benefit in the new agreement. If your employee refuses the variation, you cannot unilaterally change the existing contract. You can either (a) continue to negotiate until they consent to a variation where you both receive new benefits, or (b) give notice to terminate providing reasonable notice or pay in lieu thereof.