In Part 1 of Mind the Gap we explained how termination provisions in employment contracts can limit liability vis-à-vis dismissed employees by creating manageable and predictable termination costs for your organization. In this second installment of our terminations trilogy, we will discuss best practices for transitioning an incumbent workforce onto employment contracts which contain these termination provisions.

Obstacles to Implementing Valid Employment Contracts

For an employment contract to be valid (assuming compliance with employment standards legislation), the timing of the offer and acceptance is critical. This is because a contract requires valid consideration to be enforceable.

For example, if an employee is asked to sign a contract limiting termination entitlements after his or her hire date, enforcing that contract will be an uphill battle. Courts will typically view this as a modification of an unwritten but implied common law contract governing the employment relationship from the outset. As a result, some sort of additional monetary benefit will be required as consideration for the existing employee’s agreement to the new written contract. This is the case even if the timing of presenting the contract was simply an administrative oversight. (And no, telling employees they can keep their job if they sign the new written agreement is not valid consideration!)

Apart from consideration and timing, the other challenge to implementing a valid written employment contract for an existing employee is ensuring that the employee has an opportunity to review and understand its terms prior to signing. For example, an offer letter that refers to a termination provision in an employee handbook or company policy will typically be unenforceable unless the relevant handbook or policy excerpt was provided to the employee along with the offer letter. Put another way, courts will not enforce contracts which require employees to agree to terms of employment that they have been unable to review.

Best Practices for Implementation

Taken together, the following best practices emerge for transitioning existing employees onto employment contracts containing termination provisions:

  • Tie any offer of promotion to the signing of an updated employment contract. Courts have found valid consideration in the enhanced position and increase in compensation which generally accompany a promotion.
  • Be wary of tying annual compensation adjustments to the signing of new employment contracts. If the employee can show that he or she would still have received the raise without signing the contract, the consideration may be invalid.
  • Signing bonuses can be valid consideration for an employment contract presented to an existing employee. Although courts do not inquire into the quantum of consideration, a meaningful amount should be offered in order to compensate the employee for the loss of his or her common law termination entitlements.

Conclusion

As discussed in part one of Mind the Gap, employment contracts should be a critical piece of any employer’s strategy to contain termination costs and limit overall liability. Although courts impose hurdles to enforceability, when an employer can show that it took all the proper steps to draft and implement a contract, the case law shows that they are frequently upheld.