As you look ahead to 2023 and think about employee retention, management and the needs of your workforce, it’s also a good time to review your employment agreements and ensure everything is in order. Enforceable agreements can help you avoid unexpected liability and provide you with some assurance as you plan ahead and weigh risk and opportunity for your business. Similarly, if you are planning to implement salary increases, new end-of-year bonuses, or other new benefits to employees in 2023, these planned enhancements to employee compensation present a good opportunity to update terms of employment too.
The benefits of enforceable employment agreements
Employment agreements offer certainty to employers and employees by setting out basic expectations of the employment relationship like job title and duties, compensation, work hours and location, and how the employment relationship can end, either through termination or resignation. Where there is no employment agreement in place, or where all or part of the agreement is not enforceable, this certainty goes out the window and can create unpleasant surprises for employers. Unenforceable termination provisions, in particular, often lead to employers unknowingly wrongfully terminating an employee. This can come as a very unpleasant surprise, inviting litigation with the potential of damages awards of up to 24 months (in some very limited cases, higher) of compensation.
Why would an employment agreement be unenforceable?
The past few years have been unusual, to say the least! If an employee’s role, duties, and circumstances have changed significantly, if the true nature of the employment relationship is not reflected in the agreement, or if the law itself has changed, an old employment agreement may be unenforceable.
Employment law has recently evolved at an unusually rapid pace. New case law following Waksdale v. Swegon North America Inc., 2020 ONCA 391 (CanLII) continues to change the enforceability of termination provisions in employment agreements in Ontario. COVID-19 has also drastically changed the way workplaces operate, including the introduction of hybrid and remote work arrangements. These changes mean it’s probably a good idea to check in on your agreements if you haven’t done so in the past year.
Determining if it’s time to update an employment agreement
Use the questions below to help you determine whether it’s time for an update.
1. Has the employee been promoted a few times since their agreement was signed?
We sometimes see employees with agreements that are 12 years old, describing an entry-level job title and compensation that has changed significantly over those 12 years. An old contract that no longer reflects an employee’s current role, particularly where the employee has been promoted, may be unenforceable. Courts reason that an entry-level employee has different expectations and considerations for contract negotiations than a senior-level employee. As a result, the foundation of the terms has changed too much to enforce the contract.
If you are planning to promote an employee but have not yet done so, now is an excellent time to update the contract.
2. Are your termination provisions up to date?
When was the last time you had your termination provisions reviewed? We would recommend doing this at least annually. Two important cases were decided in Ontario this year, which impact the enforceability of termination provisions: Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451 (CanLII) and Henderson v. Slavkin et al., 2022 ONSC 2964 (CanLII). Our firm has written about these changes in a previous post; we recommend you give this a read if you have not already!
3. Has the employee been on a series of fixed-term contracts?
Fixed-term employment contracts are – as you can probably guess – contracts with an end date. Sometimes, employers bring someone in for a specific project or because they don’t have a stable source of funding. Before you know it, the employee’s contract has been renewed three times and they have been with the company for two years. When renewing fixed-term contracts, employers should consider whether it’s necessary to keep the employee on a fixed-term contract. The longer an employee remains on fixed-term contracts, the more likely a Court is to find that the employee is really a permanent employee, invalidating the fixed-term contract.
4. Is the employee improperly classified as an independent contractor?
Do you have workers who are classified as independent contractors but who are potentially employees? Check out our post on Independent Contractors for factors a Court will consider when determining whether a worker is improperly classified. If a Court finds a worker has been improperly classified, an employer may be on the hook for retroactive wages, vacation pay, public holiday pay, overtime pay, as well as termination and severance pay. An employer may also have to backpay unpaid CPP and EI contributions to the government. This can be a huge liability, so we recommend reviewing these arrangements regularly.
New year’s resolution
The key takeaway here is to review your employment agreements regularly. If you have any doubt about their enforceability, we suggest you connect with your employment lawyer for a full analysis.
Written by Evaleen Hellinga