Employment Agreements

Presented By: D. Kevin Davis, Partner
Why are employment agreements useful for an employer?
-incorporating personnel policies into the employment relationship
-excluding unwritten terms or promises from the agreement e.g. prior offers
-reserving the right to change benefits and employee duties after hire
-providing clarity for compensation package terms
-protecting employer’s confidential information and restricting
solicitation of customers by employee after termination of employment
-restricting entitlements on termination of employment to that provided
by the Employment Standards Act, with a view to excluding common law
entitlements, including extended entitlement to bonus compensation
and LTD coverage
When will agreements not survive court scrutiny?
Lack of Consideration-primarily occurs when the employee
has commenced work and is given a contact afterwards
without being provided anything of additional value.
Ambiguity-often seen with template contracts which are not
properly reviewed when prepared for each new hire. If not
carefully reviewed the agreement can be nonsensical or
exclude essential terms.
Changing nature of the Employment
If the nature of the employees position changes substantially over time, a
contract signed on hire may no longer apply. To avoid this the following
clause should be included in your agreement:
This agreement will continue to govern our employment relationship
regardless of any changes to your employment, including, but not
limited to, changes to your position, location of employment, hours of
work, compensation and benefits.
Unwritten promises
Employees will sometimes advance an argument that their agreement with
the employer includes unwritten promises made on hire. To avoid this
attack on a written agreement it should always include the following:
This agreement constitutes are entire employment agreement and
supersedes any previous written or verbal agreements between us.
Language that does not comply with the Employment Standards Act
Any provision in an employment agreement that can be interpreted to
provide something less than the requirements of the ESA is illegal and can
render the entire contract void!
This has been the most successful line of attack against employment
agreements by employee legal counsel.
Language that does not comply with the ESA
Failure to provide legislated benefits.
The termination section of any agreement must be consistent with the ESA
and must not exclude benefit entitlement during the ESA termination
notice period
In Stevens v. Sifton Properties the agreement included a termination clause
that stated:
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 ESA,
You agree to accept the notice or payment in lieu of notice and/or severance
pay 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.
The employee was successful in having the contract struck, and was entitled
to common law damages, as the court read this clause to exclude the
employees entitlement to benefits during the ESA termination notice
period, even though the employer had provided the required benefits after
the employee was terminated.
Language that does not comply with the Employment Standards Act
Termination clauses that attempt to limit the severance payment to base
salary may be void. The ESA states that where an employees compensation
is variable ( non-discretionary bonus, commission or profit sharing) it must
be averaged over the 12 week period preceding the termination, for the
purposes of determining notice and severance pay. For employees who earn
variable compensation, clauses that provided them with payments
determined on base salary, thus giving them less than their average income
earned during the past three months, will be void
Language that does not comply with the Employment Standards Act
Many “Just Cause” termination clauses used by employers will include a long
list of conduct that will give rise to termination with cause. The ESA only
provides for dismissal for cause in cases of “wilful misconduct, disobedience
or wilful neglect of duty”.
If termination language in your contract is broader then the ESA just cause
requirements it will likely be void and the entire contract struck down!
To avoid this the termination clause should either be the same as the
wording in the ESA, or if you are providing for a severance entitlement
that exceeds the ESA, then the expanded wording of just cause should
refer only to the entitlements that exceed those required by the ESA.
This issue also underscores the need to always include the following
clause in your agreements:
If any term of this agreement is found to be invalid or unenforceable, in
whole or in part, the validity or enforceability of any other provision will not be
Potential conflict with employment standards legislation
Termination language must comply with the ESA at all times. Language that
potentially does not comply with the ESA can void the contract. For
example some employment agreements state the employee will be entitled
to two weeks notice/severance for each full year worked. If the employee
were terminated with five and half years service they would be entitled to 5
weeks termination pay and 5.5 weeks severance pay under the ESA. This
contract will be invalid even if the employee is let go at a time when their
total ESA entitlement would be less than two weeks for each year worked
(e.g. if let go at year ten their ESA entitlement would be 8 weeks
termination pay and 10 weeks severance for a total of 18)
Potential conflict with employment standards legislation
The risk that a section of your employment agreement will be struck for this
reason can be reduced by including the following clause:
If the amounts or benefits to which you would be entitled to on termination
are less than the amounts to which you would be entitled under the ESA,
then you shall be entitled to notice, termination pay, severance pay and
any other payments or benefits required by the ESA at the time of your
An Ontario court has yet to rule on whether this clause will ‘save” an offending
Final Advice
If you have been using the same template for many years have your counsel
review it. If the template was provided by your lawyer, and they have not
communicated with you concerning amendments required by recent court
decisions, then you might ask why? After the Siftons’ case most diligent
employer’s counsel notified their clients of the need to change their templates.
If you are using a template pulled from the internet, or provided by one of the
HR form services, have your employment counsel review it. Most internet
agreements are worthless and some of the HR forms I have seen have not been
revised to address issues arising out of recent court decisions such as Stevens v
Final Advice
Always carefully review a template each time you use it to make sure all
relevant terms “fit” the new employees terms of hire. Be careful when using
the “last” employment agreement you prepared as there may have been
clauses that were added, or more significantly, deleted from your template
for the most recent hire.
Final Advice
Don’t be penny wise and pound foolish. These agreements are very
important and can save an employer a considerable amount of grief and
money when terminating an employee. Astute prospective buyers of a
business will ask to review signed employment agreements. I suggest you
always have your counsel review a new agreement. The cost of having a
lawyer review an agreement should be viewed as a payment for “insurance”
that your contract is valid and enforceable.
If you should need any assistance regarding employment
agreements, or any other HR issue, please contact me, at
Kevin Davis
20 Wellington Street
[email protected]

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