Navigating Your Way through an Employment Agreement

I often tell my employer clients that, if they all entered into proper contracts of employment with new hires, they would rarely require my services. It is surprising how many employers either do not utilize written employment agreements, or have agreements which are of marginal value. This is a big mistake. A written employment agreement goes a long way to establishing a certain degree of stability while minimizing the potentially costly effects of the employment relationship coming to an end. A proper contract of employment can save an employer both time and money.

The element of certainty is of particular interest to employers in the realm of actions by employees for constructive dismissal. In an action for constructive dismissal, the employee can claim that the employment relationship was terminated if an employer unilaterally alters a fundamental term of the employment contract. As a result, an element which must be included in an employment agreement is a provision which allows the employer to unilaterally change an employee’s work duties as well as compensation. While an employer normally does not have a right to make such changes, the employer can obtain this ability through a properly drafted employment agreement. This will allow the employer great flexibility in running its business, and will virtually avoid the possibility of employees commencing constructive dismissal claims.

Other things to consider in contracts of employment include what I will refer to as restrictive covenants. For the most part, these are obligations imposed on employees which will take effect after the employment relationship comes to an end. For example, employees may be required not to engage in any business which competes with that of their former employer. Further, the employees may be required to not approach any customers of their former employer. Such provisions can have a significant impact on a business’ ability to carry on after losing a key employee. These contractual terms are scrutinized heavily by the courts. This warning, however, is not meant to discourage the use of these clauses, but rather to ensure that employers are aware that the effectiveness of a written contract is inextricably linked to the skill with which it is drafted.

Perhaps the most important advantage of a written employment contract is that it affords the employer a greater degree of control over the effects of termination by defining precisely the employer’s exposure and obligations upon termination of employment. Without a written contract, the employee’s severance pay entitlements are grounded not only in statutory minimum standards, but the common law as well.

Employers are often surprised to learn that they may be liable to pay dismissed employees packages of up to 24 months pay. A properly drafted written contract can significantly limit this liability. Most wrongful dismissal claims arise where there is no written employment contract and the employer and employee disagree about the appropriate notice period. Such lawsuits can be avoided if employers simply outline, in an employment agreement, the terms which will govern the termination. The contract can also explicitly detail the specific grounds for termination, including conduct that will justify termination for cause, and can also set out the specifics of the employee’s benefits entitlements.

A written employment contract can also limit the ability of the employee to claim entitlements based on allegations of verbal promises made by the employer, for example, a verbal promise to be promoted or to receive an increase in pay. Employers can limit the potential for liability arising during the course of the employment relationship by defining the entire scope of the employment relationship explicitly and in its entirety, while explicitly precluding these types of allegations.

Properly drafted contracts will be also include a provision that affords the employee an opportunity to obtain independent legal advice prior to signing the contract. While the courts retain the discretion to assess the totality of the circumstances of the employment relationship rather than just its form, this provision can help to bolster the enforceability of the contract in the event of conflict because it can have the effect of minimizing the disparity in bargaining power typically associated with employer-employee relationships.

The above only outlines a small number of the many elements that should form part of an employment agreement. The best way to know whether your current contact is adequate, or to have a brand new agreement drafted, is to speak with a lawyer who practices in the area of employment law. Doing this can save an employer both money and aggravation and is well worth the cost.