Frequently Asked Questions
EMPLOYMENT CONTRACTS FOR EMPLOYERS
Hiring a new employee can be an exciting sign that your business is growing. Yet before your new hire starts working, you’ll want to make sure that you have a solid employment contract in place.
The employment contract is the document that spells out the relationship between you and your employee. It tells them exactly what your expectations are of them, what they can expect from you, and what happens when the employment relationship ends. The certainty in the document is meant to protect you and your business, and can be used to your advantage.
A new hire isn’t the only time to bring in a new employment contract. Contracts can be used to help bring in any major changes to the workplace, and should be revised and updated regularly. Failing to use them at all though, or failing to use them properly, can cost your business a small fortune.
You may be wondering if you just have someone working part time, or on a very casual basis, or in a low level role, whether you would even need a written employment contract or employment agreement. The reality is that every employee has an employment contract; if you don’t have a written one, then their contract is a verbal one that will not work in your favour.
Without a written contract, it is the specific terms you discussed, employment standards legislation, and previous judgments from employment law cases, that govern the foundation of your working relationship with your employee. Many terms will be “implied” into the contract by law, and those are designed to protect the employee, not you.
Legally you cannot offer an employee anything less than the minimum employment standards set out in legislation, such as the Employment Standards Act, 2000 in Ontario or the Canada Labour Code for federally regulated employers. However, an employee’s default entitlements on dismissal are typically much more than their minimum entitlements. With a well drafted employment agreement, you can specify what the employee’s entitlements will be ahead of time and reduce your liability. Employment contracts must be very carefully written if you want to minimize what you owe someone upon termination, otherwise they could be entitled to a much larger amount as decided by the Court. Learn more about that here.
Think of your written employment agreement as the document that provides certainty in your working relationship. Your goal is to maximize your rights as an employer, reduce labour costs, and create the foundation for a positive working relationship. A contract should lay out very clearly what you expect from the employee, and what they will be earning for their work. Granted there may be slight changes to a role over time, such as slight modifications in duties, or changes in hours. Language can be written into the contract to offer you some flexibility without having to change the entire agreement.
Typically, an employment contract is going to outline some of the basic details of both the employer’s and the employee’s responsibilities. This includes job duties, hours of work, compensation (including any bonuses and benefits), and any restrictive covenants such as non-competition or non-solicitation clauses. The employment contract itself does not have to be the only written document that governs the working relationship. Many employers also have employee handbooks with workplace policies that they expect employees to follow, and this can be included as an extension of the contract as well.
The most important piece of the contract for employers though is that termination clause. It’s where you (with the help of your lawyers) can skillfully limit what you owe an employee if you need to let them go. It is the one major piece of an employment relationship that does NOT default to the employment standards legislated minimums if not written down, so it must be handled carefully.
Even if you call someone a contractor and have no agreement in place, the reality is that if they are working for you they may still be your employee.
To have a proper independent contractor relationship, a contract should be in place that clearly outlines that that is the relationship between the parties. Employers sometimes prefer having independent contractors because they have fewer obligations to a contractor, are not responsible for taxes or deductions, and can end the relationship at any time according to the terms of the contract.
However, because of this power courts are hesitant to simply assume that a person is an ‘independent contractor’ without clear evidence. Unless it is written in clear language, with both parties agreeing to the relationship, that person is still for all intents and purposes an employee. Even if an independent contractor agreement looks to be letter perfect, only a court or the Canada Revenue Agency can properly assess the relationship and determine that a person is truly an independent contractor, so hiring independent contractors is always a bit of risky business. Learn more about independent contractors here.
You can, but it won’t do much to protect your business. The reality is that while employment contracts may look like boilerplate, they are actually incredibly nuanced for each individual employee, and with good reason. You would be amazed at how many clients we have seen through the years bring in contracts with either the employee’s name wrong, the company’s name wrong, reference to the wrong set of laws, or other completely inaccurate information. In many cases, the employer doesn’t even know what’s in the contract. Those contracts tend to hold up poorly in court, and the law dictates that if a contract is badly written then the person who drafted it is at fault – even if you as the employer did not write the original!
If a contract is not written specifically for your business, it likely will not help protect your business. Similarly, unless two employees are at the same salary, title, and level of seniority, then it is likely not appropriate for them to have identical employment contracts either. In employment law the ‘little things’ can make a big difference, so it is always best to use contracts you receive from a lawyer. All of that bulky wording is in there to protect you!
This is a question that comes up all the time, and to answer it it may be best to give a short explanation of what we call ‘consideration’ in law.
Consideration is what one party receives in exchange for giving something up. In a new job for example, an employee is receiving the opportunity of that new job, and in exchange they are likely signing away rights in that employment contract (usually with a termination clause). The new job is ONLY valid as consideration, though, if the employee signs the offer prior to being hired. That is because being hired is the quid pro quo for their acceptance of the contract. If they have already been hired, it’s too late.
Cases have shown repeatedly that if an employee signs a contract any time after they begin working (or when they show up for their first day), then that job is no longer valid as consideration. In that case, just as if a new contract is being offered to an existing employee, there needs to be some sort of fresh consideration. There is no legal minimum for what consideration must be (ancient law said that a peppercorn would suffice) but it needs to be something of value in exchange for what they may be giving up. This usually means a signing bonus, but can take other unique forms of compensation as well, such as a promotion, increase in pay or new benefit. Your lawyer will work with you to find the appropriate consideration for your workplace.
The short answer here is that it depends on how significant the change is going to be. Employers obviously need some degree of flexibility from time to time, and a well-written contract will build that into the agreement. If you have that flexibility built in, and want to make slight changes that do not significantly impact an employee’s wages, benefits, or duties, then you can do that without any re-writing.
If you are looking to make a significant change though then a new contract is probably in order. This is where new contracts can present a great opportunity to adjust the terms of work for existing employees. A slight salary increase or the introduction of a new benefits plan can serve as fresh consideration in exchange for changing the terms of the contract.
If the employee is going to view those changes as unfavourable, then they may not agree to the new contract. That then presents an opportunity to offer that employee working notice of dismissal- the new agreement will be in place as of X date (a date discussed with your lawyer), and if that employee does not agree to the new terms then they are no longer employed.
As mentioned above this question is false by its very nature – an employment contract is in place as soon as someone begins working for you, whether it is written down or not. It is also worth noting that employment contracts can be in writing sometimes without being lengthy – if you sent a short letter or an email to an employee before they started work but there was no follow-up document, then that letter or email is effectively your written employment contract.
If you want to introduce a written contract for an existing employee, do NOT attempt to do so without first speaking to a lawyer. This contract will require appropriate fresh consideration, and the terms should not diminish the employee’s existing setup. This written agreement will provide certainty in the relationship, and can help protect the business later on if you need to let that employee go. Remember though, a new contract would put an employee in the position of signing away rights that they already have, so this must be done very carefully in order to avoid a legal claim later.
The short answer is yes, probably, but you may not be able to terminate them for cause.
There are two types of employment terminations in Canada – termination with cause, and termination without cause. The law says that you can terminate an employee at practically any time for practically any reason without cause, so long as you provide them reasonable notice or pay them in lieu of that reasonable notice. These terms may be outlined in the employment contract, or if not are dictated according to previous case law. That is one of the most significant benefits of a contract; reducing the cost of dismissal. Learn more about that here.
Termination with cause though is more complicated. It’s the ‘capital punishment’ of employment law – the employee’s conduct has been so damaging that you are sending them out the door with potentially nothing. For that reason, courts are reluctant to find that just cause for dismissal existed unless the employment relationship has been irreparably damaged. A small breach of a contract or workplace policy will not warrant just cause for dismissal. Continued infractions or problematic behaviour may warrant some sort of performance management, which can include more serious penalties if things do not improve. If there is a serious, ‘culminating’ incident as it is known that is so significant that immediate termination is the only option then that may be another story, but do not make any sudden movements without speaking to a lawyer first.
Congratulations on your new purchase, but if you are going to make any staffing changes then you want to speak with a lawyer first.
Without getting into too much detail, how you bought the business is going to make all the difference here. If you have bought the business through a share purchase, then nothing changes with regard to the employment relationships and you inherit all of their seniority and all of the employer’s obligations. Your employees may not even realize that a change has happened. If you’ve made an asset purchase though, the situation is more complicated as there is a change of employer behind the scenes, and the old employment relationships are effectively terminated. This can be problematic if the employees just keep coming to work as though nothing has happened, so it’s definitely something to discuss with your lawyer and the purchaser.
The bottom line is that in either scenario you’ll want to look at the employment relationships prior to striking a deal. No matter how the deal is structured, work with your lawyer to take a close look at the employment relationships, and what your obligations will be if you’re looking to let go of any of the employees.
Written employment contracts are like living documents, and should really have a routine check-up every 12 to 18 months to make sure that they’re still healthy.
The reality is that employment law can change rapidly, and some of the standard clauses in employment law can be a bit of a moving target. If a court rules that language that may once have been okay is no longer valid, then that represents a change in the law, and means that all contracts with similar language should be re-examined to make sure that they would still ‘hold up’ if they were challenged in court.
If your business has employment contracts that have not been reviewed in more than 18 months, then the odds are that they would be unlikely to protect you if an employee were to sue. A well-written contract can act as a form of insurance, in that if it follows the law then it can be used as a legal defense. Having employees working under an age-old contract that has never been reviewed and is collecting dust is a bit like driving without renewing your car insurance. It does not mean that you CAN’T drive, but getting caught may prove very, very expensive.