Often, new employees do not sign their employment agreements until after they have already commenced their new employment. This can be for any number of reasons. Generally, neither of the parties involved is too concerned about it, and in most cases, they have no reason to be. However, under some circumstances, executing an employment agreement after the employee begins providing their services can have significant implications on the terms of their employment. Specifically, the signed employment agreement may be rendered void.
Basic Principles
In Holland v Hostopia Inc., 2015 ONCA 762, the Court of Appeal for Ontario had to consider whether an employment agreement, which contained a valid termination clause limiting the employee’s notice entitlements upon termination to the statutory minimums, was enforceable when it had been signed nine months after the employee had signed an offer letter and started his employment.
First, the Court found that the offer of employment and the employment agreement were not consistent. This meant that they were two separate agreements, despite the offer letter mentioning the subsequent signing of an employment agreement. The Court held that the offer of employment was silent on entitlements upon termination, meaning it contained an implied term of reasonable notice at common law. Importantly, it was also silent on whether the future employment agreement would address rights upon termination. On the other hand, the signed employment agreement did contain a termination clause limiting the employee’s termination entitlements, contradicting the implied term in the offer of employment, and rendering the two documents inconsistent.
The Court then applied the well-established principle that a promise to perform an existing contract is not consideration. That is, in order to form a binding contractual agreement, both parties must make some sort of promise or payment to the other, and a promise to uphold an existing promise does not count. This principle applies to contracts in general but is especially important when it comes to amending an employment agreement given the inequality in bargaining power between employees and employers. Therefore, if an employer wants to change the essential terms of an employment relationship, creating a new employment agreement, new or “fresh” consideration is required. As a promise to perform an existing contract is not consideration, the promise of continued employment is not consideration in such circumstances.
In Holland, the Court found that upon the employee signing the offer, the employee and employer had agreed to the terms of his employment. Therefore, the essential terms of employment were already set out prior to the execution of the written employment agreement. Further, the employee did not receive any new promise or payment from the employer when it signed the employment agreement nine months later, meaning there was no fresh consideration, and no binding contract was formed. The offer of employment governed the terms of the employment relationship, and the former employee was entitled to common law notice of termination.
Implications of Holland
The case in Holland was more clear-cut than most – the employee had already signed a document outlining the terms of his employment months before signing the “employment agreement.” However, the terms of many employment relationships are defined by verbal and implied agreements. The principle from Holland applies even where no initial document was signed or even presented, so long as the essential terms of the employment relationship were established and the subsequent signed employment agreement is inconsistent with those terms.[1]
Further, although in Holland the fact that the documents were signed nine months apart may have supported the finding that the written employment agreement was altering the terms of a separate, previous agreement, such a time frame is unnecessary for the principles in Holland to apply.[2]
However, if the initial terms are conditional upon the later signing of an employment agreement, and the terms that will be covered by that future agreement are contemplated at that time, the future agreement will not require fresh consideration, as it will be a part of the initial terms.
Takeaways
Both employees and employers should pay attention to initial offers and implied terms of employment when intending to execute a written employment agreement at a later date. This is especially true with respect to terms relating to termination of the relationship, as silence in any initial agreement implies an employee’s right to common law notice of termination. If a future written employment agreement attempts to limit the scope of such entitlements, the contract will not be enforceable without fresh consideration. This holds true unless the future signing of an employment agreement addressing the issue of termination was a condition of the initial terms of the relationship.
[1] See e.g. Theberge-Lindsay v. 3395022 Canada Inc., 2018 ONSC 3222; Gagnon & Associates Inc. et. al. v Jesso et. al., 2016 ONSC 209.
[2] See e.g. Nowak v. Biocomposites Inc., 2018 BCSC 785.