Employment contracts: Best practices for enhancing enforcability

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Osler legal updateWritten offer letters or employment agreements ensure certainty both during the employment relationship and at the time of termination. Moreover, by including a termination provision in such written agreements, employers can reduce their potential liability at the time of termination.  If they do not do so already, Hospitals should consider implementing employment agreements with all of their non-union staff.  The following principles and guidelines should be kept in mind.

Basic Principles
In order for an employment contract to be enforceable, it must contain the essential elements of a contract:  an offer by the employer, acceptance by the employee, and consideration.  Consideration consists of a benefit flowing in both directions (at its most basic level, the employee provides services, and in exchange is paid compensation).

In addition, must comply with the minimum requirements of the applicable employment standards legislation.  Finally, employees should enter into employment contracts freely, voluntarily, and without undue influence or duress.  If undue influence or duress can be shown, the employment contract will be unenforceable.

Tips for Drafting and Implementing Employment Contracts
When drafting and entering into employment contracts, certain guidelines should be followed:
-Employment contracts must be signed before the first day of work. If an employment contract that contains onerous terms (such as a restrictive termination provision) is signed after the employee’s first day of work, it will unenforceable for lack of consideration.
 -Give employees time to review the agreement.  It is important to provide the contract to the employee several days or a week prior to his or her start date, in order for the employee to review it and seek independent advice if he or she sees fit.
 -All important terms and conditions should be included in the employment contract.  If terms have been agreed to orally, those should be reduced to writing.  It is advisable to include an “entire agreement” clause in the contract, so that the employee cannot argue that other binding terms not included in the contract exist.
 -If there is reference to terms and conditions found in other documents such as employment policies, a Code of Conduct, or Confidentiality and Non-Disclosure agreement, those documents should be attached to the employment contract.
 -Use clear, explicit and detailed language, as ambiguity will be interpreted in favour of the employee, and not the employer- the drafter of the contract (the contra proferentum rule).
 -Bring onerous clauses (e.g., termination clauses) to the attention of the employee when the employment contract is presented to the employee.  In addition, it is wise to provide employees with the opportunity to seek independent legal advice prior to signing the contract. An employment contract is more likely to be enforceable if the employee was given the opportunity to have it reviewed by a lawyer.
 -Beware of imposing an employment contract on an existing employee.  New terms and conditions can be implemented with the agreement of an employee who has already started working, but fresh consideration is required.  Alternatively, new terms and conditions can be imposed on existing employees, if reasonable notice is given.

Will Restrictive Termination Provisions be Enforceable?
There is a “rebuttable presumption” that an employee is entitled to common law reasonable notice or pay in lieu, unless limited by contract.   A termination clause must be included in the employment contract (not just in a policy), must be clearly worded and unambiguous, and must meet or exceed the minimum requirements under employment standards legislation.

In Stevens v. Sifton Properties Ltd . , the plaintiff argued that a termination clause upon which the employer relied was null and void because it effectively purported to deny the plaintiff benefits during the termination notice period.  Under the Ontario Employment Standards Act, 2000 (“ESA”) an employer that terminates the employment of an employee on a without cause basis must provide termination notice or pay, severance pay (if the conditions of the legislation are met) and must continue all benefits for the minimum termination notice or pay period.  In this case, section 13 of the employment agreement provided, in part:
(b) The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice, and/or severance pay, in accordance with the Employment Standards Act of Ontario.
(c) You agree to accept the notice or payment in lieu of notice and/or severance pay referenced in paragraph 13(b) herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.

At the time of termination, the employee was entitled to three weeks of termination notice or pay under the ESA.  The employee asserted that the termination provision did not meet ESA minimums as it purported to contract out of benefit continuance during the ESA termination notice period.  Justice Leach found the termination provision to be unenforceable and commented:

encompassing specificity that results in the effective and impermissible exclusion and denial of the benefit continuation rights mandated by the legislation. …

The court went on to emphasize that “employers should be provided with incentive to ensure that their employment contracts comply with all aspects of the employment standards legislation, including provision of adequate notice (or pay in lieu thereof) and mandated benefit continuation.”

As the Stevens decision demonstrates, employment agreements must meet the technical requirements of the ESA, in all respects.  Employers are well advised to seek legal advice in the drafting of such agreements and to regularly review them to ensure continued compliance with the law.