Written Employment Agreements — Are They Necessary?

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In today’s marketplace, more and more employers are recognizing the need for written employment agreements. Advantages to a properly drafted employment agreement flow to both parties: to the employer, there is the possible escaping of a requirement to provide termination pay in excess of that required by the Employment Standards Act (Ontario) while to the employee, an employment agreement sets out the expectations of the employer and outlines the employee’s entitlement to salary, benefits and other possible compensation. Both parties must be cautioned, however, to ensure that what they ultimately sign will be enforceable and protect the rights and entitlements that they have each bargained for.

The Employment Standards Act (Ontario) (the “Act”) prescribes the minimum notice entitlement for terminated employees. An employer that wants to limit its obligation to provide notice or termination pay in lieu of notice must have a written agreement to this effect with its employee. This agreement must be carefully drafted, must comply with the requirements of the Act and the terms must be clear and unambiguous in order for it to be enforceable.

This raises the question “to what extent can an employer limit its liability to provide reasonable notice or termination pay in lieu of notice”. In effect, an employer may limit its liability to provide working notice or termination pay in lieu of notice to that which is expressly required by law under the Act. To avoid the possibility that an employment agreement may run afoul of the Act, a comprehensively drafted employment agreement should make reference to the Act and should:

  1. provide that the employee will receive the greater of (i) his/ her entitlement under the Act; and (ii) a fixed amount of reasonable notice or pay in lieu of notice; or, 
  2. provide for a notice period and/or termination pay and severance pay which is in excess of the employee’s entitlement under the Act. 

Obviously, the best time to obtain a written employment agreement is at the time an offer of employment is extended. At that time, the employee should also be provided with a letter informing the employee that the execution of the employment agreement is a condition of the employee being hired. The prospective employee should also be provided with adequate opportunity to obtain independent legal advice prior to executing and returning the agreement. An employer that follows these guidelines will make it difficult for an employee to argue that an employment agreement is unenforceable.

An employment agreement which purports to limit an employer’s liability can also be obtained from a long-standing employee with whom the employer has never had a written employment agreement so long as a number of simple steps are followed. First, the employment agreement must provide a benefit or “consideration” to the employee in exchange for its signature. The consideration for obtaining a written employment agreement mid-employment can include such things as an increase in wages, the opportunity to participate in a new or improved bonus plan or increased benefits. The continuation of an employee’s employment is not consideration enough. In Techform v. Wolda, a recent decision of the Ontario Court of Appeal, the Court held that, fundamental to consideration in the context of an employment agreement is that, in return for the new promise received by the employer, something must pass to the employee which goes beyond that which the employee is entitled under its current employment arrangement. The Court stated, “continued employment represents nothing more of value flowing to the employee than what the employee is entitled to receive under its current employment agreement”. Accordingly, an employment agreement that is presented to an employee in a “sign or you will be fired” fashion, is unlikely to be held enforceable.

If additional compensation or other consideration is not possible, an employer may provide the employee with reasonable notice (or pay in lieu of notice) in recognition of the fact that the employee’s continued employment is dependent upon the execution of the employment agreement. If the employee is unwilling to sign an employment agreement in such a circumstance, the employee will be taken to have been provided with a reasonable period of time to pursue alternate, comparable employment, thereby absolving the employer of the obligation to provide termination pay in lieu of notice.

In summary, an employer attempting to limit its liability to provide reasonable notice or termination pay in lieu of notice should:

  1. require that a prospective employee execute a written employment agreement as a condition of being hired;
  2. offer a benefit to an existing employee in exchange for the execution of a written employment agreement; or
  3. provide reasonable notice (or pay in lieu of notice) to an employee who is unwilling to execute an employment agreement. 

Employers should, in all cases, obtain proper legal advice to ensure that the agreements with their employees withstand the scrutiny of the Courts.