Employers: It’s Time for an Employment Contract Audit!

Published on: November 2023 | What's Trending

Employment contract signing

Many private sector employers in Ontario maintain and utilize template offers of employment or employment agreements to provide to employees at the time of hire or upon promotion. From time to time, such templates need to be carefully reviewed with legal counsel to ensure compliance with the latest developments in case law or changes in employment-related legislation. Clauses in employment contracts containing mistakes may be declared void, leading to unforeseen and costly problems for employers. While we recommend such contract reviews take place annually, we know some clients may be reluctant to incur such costs, particularly in financially leaner years.

Employers should be aware of recent Ontario employment law cases that have identified deficiencies in standard employment agreements and rendered integral parts of the contract unenforceable. In many cases, this has exposed employers to significantly higher costs in damages awards made to employees. Perhaps more than ever before, employers should appreciate that a diligent employment contract audit now will potentially result in exponential savings down the road.

Whether due to lack of oversight, internal amendments, or otherwise, an employer’s template document may contain “offensive language”, such as clauses that potentially contravene statutory provisions, ambiguous language, or overly broad covenants. The templates can also inadvertently contain mistakes such as inapplicable terms, outdated references, undefined terms, missing or incorrect punctuation, or irrelevant or incorrect language borrowed (or simply cut and pasted) from older templates. Recent case law examples of such simple yet critical drafting errors in the employment context include misplaced commas, wrongly using “or” instead of “and”, as well as omitting the word “only”.

Some template offer letters or employment agreements may use older terms and conditions of employment which the Courts no longer enforce, while other templates lack express language which may be required by current legislation. Some employers include lengthy policies in their employment agreement which are better suited to their human resource policy manuals, while other employers mistakenly contain key terms of employment in their policy manuals (such as temporary layoffs) instead of offer letters or employment agreements. A particularly egregious error is when the employment agreement is not compliant with the minimum standards set out in the applicable employment standards legislation. We have seen templates which do not adjust for the fact that the employer operates in different provincial jurisdictions. All of these types of drafting mistakes can make a key term or even the entire agreement unenforceable, which may lead to costly consequences for employers.

In some jurisdictions, such as the United States, the courts may “blue pencil” contractual clauses, allowing the court to try to rewrite and rectify the contractual terms to give effect to the parties’ intentions at the time of the original contract. Such an approach has been clearly rejected by the courts in Canada. In cases involving commercial contracts, Canadian courts have regularly given effect to a “severability clause” designed to sever the unenforceable provisions of a contract while maintaining the legality of the remaining contractual provisions. Notably, there have been several employment law decisions where the Ontario courts have explicitly rejected such an approach in the employment context and have found that a severability clause did not save the remaining non-offending provisions of a termination clause, which would have otherwise been enforceable.

For many employers, one of the most important components of an offer letter or employment agreement is the termination clause, which can help limit an employer’s obligations to provide termination pay in the event of termination of employment without cause. Given recent rulings from the Ontario courts, employees who are dismissed may seek to challenge the enforceability of the entire termination clause in the contract on “technical” grounds.

Many employers have traditionally used termination clauses providing for the employer’s right to terminate summarily for cause (or “just cause”) without notice or pay in lieu of notice. The Ontario courts have recently found that this once commonly accepted termination language runs afoul of the language of the ESA, which contains a different standard for employers to terminate employees without notice or pay in lieu. The ESA termination standard is one of “wilful misconduct, disobedience or wilful neglect of duty”, which has been interpreted as a narrower standard than the common law standard of “cause” for summary dismissal (where the wilful element may be found lacking). The result of the recent Ontario court decisions is to reject the entire termination provision in the employee’s contract due to the offensive “cause” provision, thus preventing the employer from limiting its liability as set out in the “termination without cause” provision.

Accordingly, employers need to take note that relying on contracts which provide for terminations for cause without notice (without ensuring minimum ESA requirements are met) will expose them to having the entire termination clause declared invalid and unenforceable, likely resulting in a successful employee claim for common law damages. The effect of such a finding can be costly, as an employee’s termination entitlement may change from as little as 2 months’ pay in lieu of notice to as much as 24 months’ pay.

Another potential pitfall occurs when fixed-term employment agreements do not contain a legally enforceable “early termination” clause. In those cases, where employees are dismissed during the fixed term, the courts have awarded damages for the remainder of the fixed term, without any obligation for the employee to mitigate damages. In one recent case, an employer was found to be liable for damages for 9 years of pay when a 10 year fixed term contract was terminated without cause after year one. A properly drafted termination clause could have prevented such a catastrophic outcome for the employer.

It is imperative for employers to recognize the risks that come with deficient offer letters or employment agreements. A diligent employment contract audit and update of template documents can alert the employer to those risks. More importantly, employers should understand that such risks can be mitigated. Employers may be able to implement new employment agreements with their existing employees and rectify the deficiencies from their previous agreements. However, simply “updating” an employee’s contract is insufficient. Employers must follow a proper procedure when implementing the new employment contracts, as a failure to provide valid consideration will lead to enforceability challenges. We therefore recommend you consult with your employment counsel to discuss the timing, appropriate procedure and consideration related to the contracts for both new and existing employees.