Consider this: you provide a new agreement to an existing employee. The agreement contains a termination clause limiting the employee’s entitlements upon termination to the minimum under the statute. The employee signs the contract. Several years later, after dismissing the employee and providing them with their minimum statutory entitlements, you receive a letter from the employee’s lawyer seeking 24 months of pay in lieu of notice. The employee alleges that the contract is unenforceable due to a lack of consideration. You seek legal advice from an Employment Lawyer and are shocked to be told that the new contract was not implemented properly, and thus cannot be relied upon. As a result, you are likely to be on the hook for close to two years of pay, instead of the eight weeks you expected.
So what is “consideration”?
Put simply, it is something of value offered in exchange for signing the agreement. Without consideration, an agreement will not be binding.
For new employees, the consideration offered at the outset of the employment relationship is typically the offer of employment itself. However, once an offer has been made and accepted, the employer must provide fresh consideration in order to change the terms of the relationship. Accordingly, if an existing employee is asked to sign a new employment agreement, they must be provided with fresh consideration (e.g. a signing bonus, a raise, more vacation days, or some other greater benefit) in exchange for signing the new contract. Otherwise, the agreement will not be enforceable.
What not to do
One of the most common mistakes employers make is to provide a verbal offer of employment, including the employee’s position, compensation, the starting date and discussion of other terms. If the employee accepts the offer, the parties have a verbal agreement, which means that even though there is no written agreement in place, the parties still have a binding contract. The binding contract includes the terms and conditions verbally agreed upon between the parties, as well as various employee-friendly terms that are implied by law (including the employment standards legislation and the common law, such as the duty to provide reasonable notice or pay in lieu of notice upon termination without cause).
After the verbal agreement is already in place, and after the employee has already started working, many employers then have the new employee sign a written contract outlining various terms and conditions that benefit the employer. Since there is already a binding agreement in place at that time, both parties must receive some sort of consideration in order to have an enforceable new agreement.
Proper implementation is key
It is critical that employers provide employees with effective written agreements before they commence employment, and ensure that the agreement is signed before the employee actually starts working.
For existing employees, employers must provide fresh consideration in exchange for signing the new contract in order to ensure that the contract can actually be relied upon. We often recommend employers to put new agreements in place when they offer a promotion or a pay raise. If the employer is not planning to offer a promotion or a raise, then they can offer a one-time signing bonus, more vacation days, or anything else that has a real value to the employee.
The issue is not whether the employee has signed the contract, but whether a court will find the contract enforceable in the future. Otherwise, the contract will not be worth the paper it is printed on.
Employers would be wise to ensure they have enforceable written agreements in place that maximize their rights and flexibility, and minimize their costs and liability. Here are some best practices for employers:
- Once you have selected a candidate, advise them that the company intends to make an offer of employment based upon the terms and conditions set out in a written contract.
- Draft an enforceable and effective contract with the assistance of an Employment Lawyer.
- Make it clear that the candidate has not been hired until all of the conditions of employment have been met (e.g. background/reference checks) and that they should not take any steps, such as resigning from their current job, until the company provides confirmation that all conditions have been satisfied.
- Provide the written contract to the candidate and allow them at least five business days to review the offer and seek any professional advice as they wish.
- Do not assume that the candidate has become an employee until the individual has actually accepted the written agreement (avoid “welcome aboard” type messages).
- Retain a copy of the signed contract, and ensure that it is signed before the start date.
- When implementing new agreements for existing employees, ensure the written agreement is clear about what the fresh consideration is (e.g. signing bonus), and provide the consideration after the agreement has been signed.
- Employment laws are constantly evolving. Get your contracts reviewed by an Employment Lawyer at least on an annual basis – yes, even if an Employment Lawyer had prepared them in the first place!
By Nadia Zaman