Employment Contracts

Employment Contracts – Overview

Every employment relationship is a contract, whether the contract is written or not. The employer agrees to pay the employee on a certain basis. The employee agrees to do the work. There may also be a whole range of other understandings between the employer an the employee – as to how the work will be performed, when the employee will be paid, and all kinds of other matters covered by express or implied employer policies on everything from annual vacation time to workplace conduct. Whether or not there is a written employment contract, Canadian law adds a number of minimum terms and conditions – usually found in provincial or federal employment standards legislation.

If there is no written employment contract, most employees are entitled to reasonable notice of dismissal if their employment is terminated – or payment instead of notice. As discussed in the dismissal section, there is no fixed amount of notice or compensation, but it can often be at least one month’s compensation for each year of service.

If there is no written employment contract, most employees are free to work anywhere they choose after leaving their current employer – even in positions that involve soliciting or dealing with customers of their former employer.
Why employers use written employment contracts:

Employers hiring new employees are often in a better bargaining position than the employees they are about to hire. As a result, they can use written employment contracts to change some of the implied terms of the employment relationship to their benefit. Employers often do use these contracts to do three things:

To reduce the cost of dismissing employees

As discussed above, most employees without a written employment contract are entitled to “reasonable notice” of dismissal or pay instead of notice. This can get very expensive for employers – who may have to pay up to two years’ compensation for some long service employees. But employers can get around this by using a properly prepared employment contract. The written contract can include a termination provision that limits the employee’s possible claim to notice to as little as the minimum required under the relevant employment standards legislation.

Here’s an example of how that works. Suppose a sales representative is hired by Xco without a written agreement. She works there for six years and earns $65,000 per year, including commissions. At the time of dismissal, she is 44 years old. Without a written agreement, and assuming that she has been dismissed without just cause, she will probably be entitled to six months’ notice or pay instead of notice, based on $65,000 per year.

If the same sales representative had signed a written agreement, limiting her notice on dismissal to “the minimum required by applicable employment standards legislation,” she could be dismissed in Ontario with only 12 weeks pay (assuming the employer has a payroll of at least $2.5 million in Ontario). If she was working for a smaller employer, or in another Canadian province, it might be because of a written employment contract.

To Protect The Employers Confidential Information and Customer Base

Without a written employment agreement, most employees are free to work anywhere they choose after leaving an employer. Usually, they can even conduct business with their former employer’s clients. However, employers can use properly prepared written employment contracts to protect their interests. Such contracts can include confidential information clauses that define confidential information and prevent employees from using such information after leaving the employer. Contracts can also include “non-solicitation” clauses, which prevent an employee from soliciting business from their former employer’s customers for some reasonable period of time. Some employers also try to include blanket non-competition restrictions, designed to keep employees out of the industry entirely for some period of time.

Courts are willing to enforce confidential information and non-solicitation clauses that are narrowly prepared and are intended to protect the employer’s proprietary interests – and not simply aimed at preventing competition. Courts are less willing to enforce blanket non-competition clauses, particularly where these clauses will keep the individual out of the industry altogether for some set period of time.

There is little benefit to the employee in signing these agreements although some employers will not hire employees unless they agree to sign. Sometimes modifications can be negotiated that narrow the scope of the agreement or include a list of clients who are excluded from the agreement because of pre-existing relationships with the employee.

To Allow More Flexibility in Dealing With Employees

Written employment contracts can also include terms allowing employers to change the rate of pay, the commission rate, the job title or other aspects of the job subject to certain terms or conditions. Without a written contract, many of these changes would be fundamental changes to the employment relationship – and would allow the employee to quit and sue the employer for “constructive dismissal” if the employer tried to impose the changes without agreement. A written contract can be used by employers to avoid this problem and to create flexibility in how the employer may deal with its employees.

Employers can also include broad definitions of conduct that will be considered “just cause”. By doing this in a written employment contract, employers can make it easier to dismiss employees without having to pay anything at all.
Why employees might want written employment contracts

As discussed above, employees have certain levels of protection in employment even without any kind of written agreement. Since employees often have less bargaining power than their new employers, it is often better not to have a written employment agreement than to have one. However, there are some circumstances in which it may be helpful to have one:

To Include a “Golden Parachute”

Employees in a very strong bargaining position may be able to negotiate a very generous severance provision that is to be included in the written employment contract. The provision may call for a certain minimum payment, to be paid as a lump sum in a specified time period. Often, the provision may also allow the employee (usually a senior executive) to receive a severance package in certain other conditions, where the employee would not normally have been entitled to a package – for example, where there has been a change in ownership of the employer.

Sometimes, employees who are leaving one secure job to accept another one and have been recruited may be able to convince the employer to specify a certain minimum severance package that will be provided to the employee if the employee is dismissed for any reason within a certain time period.

To Specify Agreed Upon Payment Terms

Employers sometimes use very complicated payment policies and commission schedules. Often it makes sense for employees to ensure that these are carefully detailed – including provisions that specify what happens to outstanding commissions if the employee leaves the employer.

To Specify Any Other Promises

If the employer has made certain promises to get the employee to accept employment – these promises should be included in any written employment contract. For example, if the employer has promised a certain minimum bonus payment, that should be set out in writing. If it has been promised but is not in the written agreement, the promise may become worthless.

Written employment contracts are very technical and are set up to address constantly changing laws. For employees, it is crucial that the employee understand what he or she is signing before agreeing to the contract. There may be an opportunity to negotiate and change some parts of the contract before signing off. This can save thousands of dollars later.

For employers, it is important to remember that the contract may be worthless if it is not properly prepared and legally enforceable. If the termination provision is too short – or if the post-employment restriction is too broad, the entire written employment contract may be unenforceable and worthless.

Ken Krupat has prepared, reviewed and given advice about hundreds of employment contracts for employers and employees. He can assist employers to prepare proper, enforceable written agreements that will provide meaningful protection and save costs. He can also help employees to understand their agreements and to negotiate or even challenge written agreements where they are not in the employee’s interests.