The Importance of Employment Contracts

Employers are being challenged by the changes that COVID-19 has wrought on the employment landscape and many of them are faced with very difficult business decisions affecting the viability of their enterprises as the pandemic takes its toll on the economy. In the middle of all this, some employers are beginning to understand the critical importance of properly conceived and drafted employment contracts.

As the economy re-opens and employers begin recalling their employees back to work, some employees are returning to their previously existing jobs while others are returning to new roles as organizations adapt to the new reality. Every employment relationship, new or existing, constitutes a contract, whether it is written or verbal. The hiring of an employee is an exchange for consideration. So, the employment contract is an agreement between an employer and employee regarding the terms and conditions upon which the employment is based. The employer agrees to provide various forms of compensation in exchange for the services or work that the employee agrees to perform.

In general, the terms of employment can come from a variety of sources, which can include:

  • Verbal agreements
  • Written contracts or similar documents
  • Employee handbooks or company notice boards
  • Letters of offer from the employer
  • Elements required by law (e.g. paid at least the minimum wage)
  • Collective agreements (applies to unionized employees).

Beyond the legislative requirements, any promise an employer makes to the employee such as a raise in salary after a specified time, will form part of the contract. With regard to legislation, no employment contract can circumvent the law. That means the contract or terms of employment cannot be below the statutory obligation. For example, an employer cannot offer a notice of termination that would be less than the employee’s legal entitlement after a period of employment, and should indicate that notice will be consistent with the Employment Standards Act.

Unwritten Employment Contracts

A verbal agreement is a valid and enforceable contract between an employer and employee. The terms and conditions of employment are covered by a variety of laws such as the Employment Standards Act, Occupational Health and Safety Act, Labour Relations Act, Workplace Safety and Insurance Act, Pay Equity Act and Human Rights Code. Contracts, whether written or not, must meet the minimum standards set out in the legislation and be valid in common law.

While the unwritten contract has equal force in law as those that are written, the employer and employee have to place trust in the good faith of the other to fulfill their promises. When this is not the case it will be up to the court to determine the authenticity of promises made and what constitutes reasonable terms. It should be noted that the costs, both monetary and operational, to resolve such disputes can be quite high. Types of costs include lawyers’ fees, court costs, settlements and court judgments, and these costs can result in disappointment and frustration for both parties.

Without a written employment contract/agreement such as a formal Offer of Employment or a formal Employment Agreement, employers can incur significant risk – from litigation to frustrated and disgruntled employees, and low workplace moral. Having a written employment contract brings clarity to the working relationship, avoids future misunderstandings, and establishes the key responsibilities of the employer and employee in fundamental areas.

Written Employment Contracts

A carefully written contract will address all the terms of employment between the employer and employee.

A carefully written contract will address all the terms of employment between the employer and employee.

Two common forms of written employment agreements are the Letter of Offer of Employment and the more formal Employment Agreement. The Letter of Offer of Employment could simply provide the basis from which a formal agreement/contract will later be formed or could stand alone.

In order for an employment contract to be enforceable, either the employee must have signed it prior to their first day of work or the employer must be able to show that a contract signed after commencement of work precisely reflects all the terms agreed to between the parties prior to the start date by the employee, without any additions or deletions. These caveats are in effect whether it is a verbal offer of employment or agreement or a written Letter of Offer. Failing this test may render a contract void in the eyes of the court. In order for the contract to be valid, the employer may be required to offer additional consideration as fair exchange for the employee’s signature after the fact if any part of the written contract differs from the verbal contract or offer.

A carefully written contract will address all the terms of employment between the employer and employee. It will leave no room for ambiguity or future misunderstandings. This is especially important should a dispute arise such as in the case of a termination. In addition, the same contract will ensure the neither party will hold a particular advantage over the other in arriving at the agreement.

In circumstances where the terms of employment do not vary from the legislated minimum, a written contract may not be necessary. Yet there are most often additional terms, such as insured benefits, that are not covered by the Employment Standards Act. Written contracts are a good idea when the terms and conditions of employment exceed legislative requirements or there are issues of confidentiality or proprietary information involved.

Where there are more involved terms of employment, which can be the case with senior management or professional positions, it may be advisable to utilize a more detailed contract. This provides the opportunity and scope to adequately address such issues as bonuses, performance requirements, issues of confidentiality and any other specially negotiated terms.

Finally, in most instances, the employer holds the advantage in recruiting. As such, it is wise to give a prospective employee time to consider a formal offer. The employee should be encouraged to seek independent advice on the terms and conditions contained in the agreement.

Summary

At a minimum, agreements should include the following:

  • Starting date
  • Term – if a specified term, the start and end dates should be clearly articulated and language should deal with what happens if the term is reduced or lengthened.
  • Relocation support if necessary
  • Position and scope of duties
  • Reporting relationship
  • Hours of work
  • Salary – for salaried employees it is common to annualize the amount paid but the frequency of pay can be weekly, bi-weekly, monthly or semi-monthly.
  • Vacation – qualifying period, accrual, pay out on termination are important issues.
  • Benefits – qualifying periods, cost sharing and discontinuation should be covered.
  • Termination – contemplate and specify termination conditions. It is wise to include a provision for termination of the agreement. Having such a provision allows the parties to understand behavior expectation, process of termination, and method of granting any severance or termination. It is generally wise to include language for both ‘just cause’ and other situations that give rise to termination. Notice in case of termination should be quantified.
  • Mutual Agreement – the contract must be mutually agreed upon. A contract signed under coercion or duress will not be deemed valid if challenged in court.
  • Special Terms – address any special terms that may not be covered by the organization’s policies.
  • Acceptance – the signature of the employee indicates they have read, understand and accept the agreement. The employee’s acceptance should be prior to the starting date if at all possible, with special attention to additional consideration if the signing is post-commencement.

Written contracts also typically share the following characteristics. They:

  • Avoid misunderstandings between the parties about terms and conditions of employment (especially when they exceed the legislative minimum).
  • Address particular performance goals/targets as conditions of employment.
  • Specify and detail probation provisions.
  • Establish non-competition or non-solicitation restrictions on employee, depending on the nature of the position.
  • Address complicated salary issues such as bonus, profit sharing and ownership.
  • Identify specially negotiated terms such as car leases, health benefits and memberships.
  • Use clear and unambiguous language.
  • Use the proper names of the parties.
  • Address and protect employer’s confidential and proprietary information.

Note: Because written contracts are often unique to each individual, consideration should be given to seeking professional advice to ensure they are reasonable and defensible and able to withstand a court challenge and, as importantly, provide clarity and protection to the parties.

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