Employment Agreement, Do I need one?
I am no longer surprised when I meet with employers and employees and they cannot recall:
(a) if they have an employment agreement; or
(b) what the terms of the employment agreement set out.
Why Is Employment Agreement So Important?
Despite the lack of attention, an employment agreement is important! It defines rights as between the employer and the employee and specifically at the time of termination.
The first thing employers want to know when they are preparing to let someone go is: How much notice (or pay in lieu thereof) do we need to provide? On the other hand, when an employee is fired, without cause, they want to know whether the severance pay provided is fair.
With a valid and enforceable termination clause the answer to these questions can be straightforward. However, drafting a valid and enforceable termination clause is trickier than it sounds. Lawyers spend countless hours arguing over this exact point. There are numerous court decisions that have considered this issue over the years.
Two of the most common challenges to the validity and enforceability of the employment agreement and the termination provisions within are as follows:
1. Was the employment agreement enforceable if it was signed after the first day of employment?
Typically, for a contract to be binding, each of the parties to the agreement must receive consideration. Consideration can be something of value which each party to a legally binding agreement must agree to exchange. Where employment has already commenced prior to an employment agreement having been signed, the employer may be required to offer “fresh consideration”.
The takeaway for employers is that employment agreements ought to be signed prior to the employee’s start date. There are ways of implementing new employment agreements for current employees, but generally, it is in the employers best interest to have the employment agreement signed prior to the employee’s start date.
Ensuring that the language in the termination clause is compliant with Employment Standards minimums is not as simple as it sounds.
Even one small mistake can render the entire clause (or agreement) invalid. For a non-lawyer, trying to save a few dollars by drafting employment agreements on their own, can lead to very costly mistakes if the pay or notice period set out in the agreement does not comply with ESA minimums.
How costly you ask? Instead of pay or a notice period of a few weeks, the employer might find itself responsible for several months of notice or pay to the terminated employee.
The difference between 4 weeks and 6 months can be financially debilitating for a small to mid-size employer. Likewise, employees are best served when they understand their contractual rights contained within the employment agreement.
At the time of termination, employees often believe that they are entitled to significantly more notice or pay – and are then surprised to find out that the employment agreement they signed some time ago, significantly limits their entitlements upon termination.
How Can An Employment Lawyer Help With Employment Agreement?
Having an employment lawyer review your employment agreement prior to signing will help you to understand what you are signing and in many cases will help you to negotiate more favourable terms. Employees should also seek the guidance of an employment lawyer at the time of termination.
While you might think that the ESA and your employment agreement limits your entitlements upon termination, the employment agreement and/or termination clause may be invalid.
Need help drafting or negotiating an employment agreement?
References and Footnotes
- The Government Of Ontario, Your Guide To The Employment Standard Act ↩