Employment Contracts Should be Carefully Drafted and Periodically Reviewed

by emond harnden LLP

Regardless of whether the terms and conditions applicable to an employee have been spelled out in a formal written contract, every employment relationship is, in fact, governed by an employment contract. It is formed at the point when the employee accepts a job offer and some consideration is exchanged (generally the promise to hire in exchange for the agreement to perform the work according to the terms presented). In the absence of a written contract, courts will do their best to ascertain what the parties intended the terms and conditions would be when the contract was formed. As a result, it is generally in the interests of both parties to spell out the terms and conditions of employment in a clear written contract at the outset of their relationship.

In order to ensure that such a contract is enforceable, it must be presented to a future employee before he or she begins working, with suff icient time to seek independent legal advice, should they wish to do so, prior to the contract being signed. Because courts will interpret any ambiguities in an employment contract against the interests of the party who drafted it (generally the employer), it is critical that the terms of a written employment contract be set out clearly and unequivocally.

While a clearly drafted employment contract will set the parameters of the relationship and govern the conduct of the parties during the course of that relationship, it can also play a pivotal role in laying out the employer’s obligations should it wish to terminate the relationship. Through carefully constructed termination clauses, employers can minimize their liability in the event that an employee is subsequently terminated on a without cause basis. In Ontario, the Employment Standards Act establishes the minimum entitlements of employees whose employment is terminated. Employment contracts must be consistent with these legislated minimums if they are to be enforceable. An unenforceable termination provision will expose the employer to significantly greater liability under the applicable common law rules regarding notice or pay in lieu of notice.

Recent court decisions illustrate that while having a clear written employment contract at the outset of the employment relationship is a good start, it is not enough to ensure enforceability down the road. In Stevens v. Sifton Properties Ltd. (2012), an Ontario court held that the termination provision in the employee’s contract was unenforceable, because it did not specifically reference the employee’s entitlement to continue receiving benefits for the duration of the applicable statutory notice period. The court came to this conclusion despite the fact that the employer had actually continued the employee’s benefits for the required period. The employee was therefore entitled to common law reasonable notice.

Another court decision from 2012 also gave employers reason to review (and potentially revise) their existing employment contracts. In Bowes v. Goss Power Products Ltd., the Ontario Court of Appeal held that where parties had specified in the employment contract the period of notice that the employee would be entitled to upon termination (six months in that case), without making any reference to the employee’s obligation to mitigate, they had opted out of the common law rules that would otherwise apply, including the employee’s obligation to mitigate (or minimize) his or her damages by seeking alternate employment. The employer was required to pay Mr. Bowes the full six months provided for under the contract, despite the fact that he had found alternate employment two weeks after he was terminated. Employers across the province should review existing employment contracts in light of these two decisions, both of which reflected a change in the law as it had been previously understood, in order to ensure their ongoing enforceability.

A well-drafted employment contract that clearly establishes the parameters of the employment relationship will provide clarity to both the employer and the employee during the course of their relationship and in the event of termination.