Importance of Employment Contracts

Preparing Your Business For Growth-The Importance of Employment Contracts

Starting a new business can require a lot of work, time, and money. In most instances, the new business starts small. For the first months or even years, they will consist of one intrepid business owner, trying to expand their clientele, bring a product to market, or improve their service offerings. Yet as these businesses become successful, they quickly begin to grow. When that individual can no longer handle all aspects of the business themselves, they’ll soon begin to hire employees – perhaps part-time at first, then full-time, and then suddenly the team has grown. 

The trouble is that most often new employers do not have any background in HR or employment law. They’ll usually invite new team members on board without any sort of written employment contract or may grab one from a friend or the internet without understanding what that contract says or how it works. Not only are these contracts usually ineffective, but they do little to protect the business when problems later arise. 

Why does a business need employment contracts? How should it implement those contracts for existing employees? Does a business owner need to redo their existing contracts? Our employment lawyers regularly receive these questions from clients, and we wanted to provide a few answers.

Why does our business need written employment contracts?

Employers often think that without a written contract, their business has no formal employment contracts in place. This is incorrect.

In Ontario, for non-unionized workplaces (with some industry exceptions), the default legislation is the Employment Standards Act, 2000 (the “ESA”), which functions as sort of a default employment contract. The ESA outlines the minimum standards that employees are entitled to in a workplace including hours of work and overtime, vacation pay, and various job-protected leaves. The ESA sets a floor for Ontario employees, not a ceiling, and the terms of any written contract cannot go below these standards.
The key difference, and where employers usually end up in trouble, is the issue of termination pay. While the ESA outlines what employees are entitled to receive if they are let go, this is only the minimum entitlements, and employees are not locked into these amounts automatically. Rather, employees might actually be eligible for common law notice, which is calculated based on their age, experience, and the nature of their work – and can be significantly more expensive for employers.  With a well-drafted employment contract, an employer can limit an employee’s entitlements upon termination to only the ESA minimum requirements and prevent having to pay out additional notice to employees. 

Can we give contracts to employees who don’t have them?

The short answer is yes, but you need to provide a little consideration. 

Employers will often hear or learn following a prior termination experience that they need a well-drafted employment contract to limit their liability upon termination. Some employers will rush to introduce new contracts to their existing employees before understanding what steps are required before an employee can sign off. The reality is that those employees already have contracts – they are simply not written down. By default, they have been working under whatever terms had been agreed upon initially and have the ESA to fill in any gaps that were left unmentioned. Most written employment contracts are designed to operate in the employer’s favour, so what incentive do employees have to sign a new agreement?

The answer is known in law as ‘consideration.’ Consideration is the basis of contract law that states that anyone signing a contract must receive something in return. When an employee is just starting, the new job is the consideration – they should sign the contract before they start working, and thus receive a job in return. For existing employees, however, they need to receive something in addition to what they are already getting. There is no set amount for this consideration, but employers will often use a slight promotion or a signing bonus to entice employees to sign the new agreement. If new consideration is given to an employee in return for signing the employment agreement, the new terms (often inclusive of a restrictive termination provision) will likely be binding. 

Employees should also be given the opportunity to review the new contract with a lawyer, and many employers will offer a small amount to cover that consultation.

Do we need to redo our existing contracts?

Employment contracts are a bit like non-perishable food items in your cupboard. They may be fine for a while, but if left and forgotten about they can go stale after a year.

Employers should have their employment agreements reviewed by a lawyer annually to make sure that they are up to date. The reality is that the law changes frequently, and what may have been acceptable to a court one year may no longer be legally acceptable the next. For example, termination clauses are an employer’s best protection against paying out large sums in termination pay – the difference can be 8 weeks vs. 24 months. Yet for those clauses in a contract to be effective they must be written very carefully, and the law changes frequently as to what wording is acceptable. Regular reviews may be an ounce of prevention but are well worth the pound of cure.

Final Thoughts

Employers are usually not experts in employment law, nor should they need to be. There are dozens of different laws that affect various aspects of the workplace, and employers are simply too busy trying to grow and run their business to focus on every last detail. 
Let Pavey Law help where it counts. Our employment lawyers are well familiar with the important legislation you need to know and understand how it impacts your business. We routinely help employers in the Cambridge, Kitchener, and Waterloo region implement new contracts that help keep their businesses running smoothly. Contact us today to set up a consultation.