The Reality Employers Encounter When Overlooking a Fundamental Contract Principle
A Costly Employment Contract Error
Imagine this: You hire the perfect candidate. You email them an offer with their role, salary, vacation, and schedule details. They accept the offer, providing their legal name and start date.
On their first day, you hand them a seemingly strong employment contract. It includes termination provisions aligning with Ontario’s Employment Standards Act, 2000 (ESA). Confident you’ve protected your business, you move forward.
Fast-forward five years. You terminate the employee, offering the minimum entitlements outlined in the contract. A week later, you receive a demand letter. A lawyer claims your former employee is owed 12 months’ pay, not five weeks.
Shocked, you consult an employment lawyer. They explain your contract is unenforceable because it lacked consideration. Now, you’re facing a large payout and grappling with the importance of basic contract principles.
Essentials for a Legally Enforceable Employment Contract
Creating an enforceable employment contract involves meeting specific legal conditions. Here’s a breakdown of the key elements:
Capacity to Contract
Both parties must have the capacity to understand the contract. This includes its terms, implications, and consequences. The law protects individuals, like minors or those with certain disabilities, who may not fully comprehend agreements. Without this understanding, contracts cannot be legally binding.
Capacity ensures agreements are made with a “meeting of the minds” (consensus ad idem). This creates fairness and makes contracts enforceable in court.
Intention to Create a Legally Binding Agreement
Contracts are only valid if both parties intend to make a binding agreement. Courts avoid getting involved in casual promises or social agreements. For example, missing a dinner plan with a friend doesn’t qualify as a breach of contract.
This distinction ensures courts focus on disputes that genuinely require resolution. It prevents trivial matters from overwhelming the legal system.
Offer, Acceptance, and Mutual Consideration
Once capacity and intention are established, a contract needs an offer, acceptance, and mutual consideration. An offer is a proposal, and acceptance is agreeing to it. Mutual consideration means both parties provide something of value they wouldn’t otherwise have.
Without these elements, a contract cannot be legally enforceable.
Why the Employer Was Liable for a Large Payout
In this case, the employee signed a contract without termination terms. This triggered an implied term for “reasonable notice” under common law. Reasonable notice often exceeds the statutory minimum and depends on factors like job availability, length of service, and age.
Attempted Contract Modification
When the employee started working, the employer tried to change the contract. They added a termination clause allowing just five weeks’ notice. However, the employer didn’t offer any new benefits in exchange for this change.
Promising continued employment wasn’t valid consideration since the employee already had that benefit. For contract modifications to be valid, both parties must receive something new and valuable.
The Importance of Fresh Consideration
To enforce the new terms, the employer needed to provide written evidence of fresh consideration. This could include a signing bonus or extra vacation time. Without offering something tangible, the contract modification was invalid.
As a result, the employer faced significant payouts. The employee was entitled to reasonable notice under common law, which was much greater than the statutory minimum outlined in the ESA.
Best Practices for Enforceable Employment Contracts
Navigating employment contracts can be tricky, but enforceability is key for employers and employees. Even carefully drafted contracts can lose legal standing without following specific guidelines. Use these best practices to protect your rights and avoid costly mistakes.
Communicate Early and Clearly
- Start early: Once you choose a candidate, inform them quickly about your intent to offer a written contract.
- Be transparent: Clearly state that employment depends on meeting all requirements, such as background checks. Encourage candidates to stay in their current jobs until they meet all conditions.
- Provide contracts early: Share the contract at least one week before the start date. This gives the candidate time to review, get legal advice, and sign.
- Avoid confusion: Include all related documents, like handbooks and appendices, to ensure transparency.
Draft Enforceable Contracts
- Seek expert help: Work with a lawyer to draft strong employment contracts. Alternatively, use our lawyer-created templates.
- Be precise: Write clear, detailed contracts that leave no room for misinterpretation.
Timing and Documentation
- Control onboarding: Wait to send onboarding documents until all job conditions are met and the contract is signed.
- Track important dates: Record when the contract was shared, signed, and the employee’s start date.
- Sign before starting: Ensure the contract is signed and returned before the employee’s first day.
Stay Compliant and Organized
- Review contracts regularly: Laws change. Review contracts yearly to ensure they remain enforceable.
- Keep records: Store both physical and digital copies of signed agreements for easy access in the future.
Why Termination Provisions Matter
Termination clauses may feel uncomfortable but are essential. Without them, employers could face costly payouts due to common law notice periods. Including these provisions saves money, sets clear expectations, and ensures fair treatment if the relationship ends.
Key Takeaways for Employers
Even the best-written contracts can fail if they ignore contract law principles. Remember, once an employee accepts an offer, it becomes legally binding. To safeguard your business, incorporate termination clauses and address all legal details upfront.
Looking for affordable legal protection? Check out our lawyer-created employment contracts. They’re built to protect your business and simplify the hiring process.
Disclaimer: The content provided on this blog is for informational purposes only and is not intended to be, and should not be taken as legal advice. The discussions and insights featured herein are meant to enhance your understanding of legal matters in a general context. However, each legal issue has its own unique set of facts and circumstances and should be discussed with a qualified legal professional. For advice tailored to your specific situation, please contact a lawyer of your choice. Use of this blog does not create a lawyer-client relationship between you and the authors of this website.