What Employers Need To Know About Employment Contracts

The legal foundation of every employment relationship is a contract, whether it is written, oral or a combination of both. A written employment contract does not need to be complicated or full of legalese – it is merely a document that sets out the key terms and conditions of employment. However, it is also a powerful tool designed to protect an employer’s interests, including its bottom line. 

Notwithstanding the value of employment contracts, many organizations do not set them out in writing – but they should. A properly executed employment contract will help employers effectively manage the parts of employment relationships that are most likely to give rise to unexpected liabilities. 

Here are a few of the most important things to know about employment contracts.

What does an “Employment Contract” look like? 

A common question concerns the form of an employment contract – i.e., what should it look like? There is no prescribed form for an employment contract. Offer letters, term sheets, employment contracts and employment contracts are all essentially the same thing – just different names for a document that records key terms and conditions of employment in writing. 

Employers sometimes shy away from using employment contracts because they do not want to bother with complex legal documents. There is a time and place for lengthy, “commercial-looking” employment contracts, but in most cases, an employment agreement can look just like a short letter, often with numbered or subtitled paragraphs addressing each of the key terms. A good employment contract is simple, well organized, and easy to understand. 

Timing is very important 

It is always the best practice to have employees sign their employment contracts before they commence their first day of work.  Employers can run into trouble if they permit employees to begin working before they sign their employment contracts. This is because our courts often take the view that an employment contract signed after an employee has started working – even for just a day or two – is void and unenforceable for lack of “consideration.”  

A basic principle of contract law is that for a contract to be enforceable, there must be an offer, a corresponding acceptance, and evidence of valid consideration (i.e., something of value) flowing to each contracting party. In the employment context, these requirements will be satisfied when the employer presents the employee with a job offer and the employee accepts the offer before they start work. In such circumstances, the “consideration” flowing to the employee is the employment itself (i.e., the job).

A problem arises if the employer seeks to introduce a new employment contract after the employee has already commenced work. In this scenario, the employment relationship cannot constitute the necessary consideration because the employment relationship already exists. In other words, the employer cannot give the employee the job as consideration because, once the employee has started working, they are presumed to already have the job.  

Therefore, to help ensure that an employment contract will be enforceable, the contract should be provided to the employee before his/her first day of work. A signed copy should be received by the employer before the employee performs any work. 

What should be included in an employment contract? 

The hiring process can be an exciting time for employees, and they may not be entirely focused on the details of the proposed employment terms, particularly if those terms are not set out in writing. Written employment contracts provide the parties with clarity regarding the key terms and conditions that will govern their employment relationship. This clarity helps ensure employees are not caught off guard by terms they may not recall discussing with their employer. It also helps protect employers from claims for additional compensation, benefits not agreed to, or allegations of misrepresentation. 

A standard employment contract should typically address each of the following items:

• start date;
• job title and general indication of the employee’s role/duties;
• rate and method of pay;
• benefits, such as extended health and dental benefits (if any); 
• vacation entitlement; 
• entitlement to notice of termination or pay in lieu of such notice (one of the most important provisions of an employment contract); and  
• confidentiality requirements and/or restrictive covenants (where applicable).

Is it a good idea to provide a preliminary term sheet or offer summary?  

Sometimes, employers like to provide a preliminary term sheet or offer summary – sometimes called an “offer letter” – and then, if that offer is accepted, follow up with the execution of a more detailed employment contract. This is fine, but note that once accepted, and certainly after the employee begins work, an offer letter will be deemed to be a binding agreement on the terms and conditions of employment set out therein. If the employer subsequently seeks to introduce a new, more detailed employment contract after the employee starts work, it will run into the timing problem discussed above. The result may be that the original offer letter will be deemed to be the governing contract, rendering the follow-up contract unenforceable. This can be problematic since the offer letter might leave out many of the important terms and conditions included in the more detailed follow-up contract. 

Therefore, it is important that an offer letter contains all of the terms and conditions of employment or, at least note that the offer is conditional on the candidate executing a full written employment contract, which will set out additional terms and conditions of employment, including, but not limited to, those summarized in the offer letter.

Once again, to avoid surprises, the best practice is to ensure that all key terms of the employment relationship are provided to employees at the outset before they commence work.

What about employment termination provisions? 

Some employers do not like to talk about the end of the employment relationship in a document that is to be presented to a candidate at the commencement of that relationship. However, the most costly disputes associated with employment relationships arise upon the termination of employment. For this reason, having an enforceable provision that governs the termination of employment and limits the employer’s liability regarding reasonable notice or pay in lieu thereof is a key aspect of a written employment contract. 

While the Employment Standards Act sets out the minimum period of termination notice, the courts will invariably award an employee a considerably longer period of “reasonable notice” or severance pay in lieu thereof. However, the Courts will give effect to termination provisions in an employment contract that limit the employee’s notice entitlement to the minimum statutory entitlement (or some other more generous notice formula), provided that the termination provisions are clear and unambiguous. Our advice is – do not leave this out.

Legal Advice 

It is always important to remember that an employment contract is a legally binding document. It is intended to clearly identify significant employer obligations and limit potentially substantial liabilities associated with the employment relationship. It is not a document that should be sketched out on a napkin, nor should it be drafted or amended by someone unfamiliar with contract law. 

When in doubt, get legal advice on what is required to make a contract enforceable in any given situation. The advice will be simple and help ensure the contract is worth more than the paper it is written on.