With St. Patrick’s Day having just passed, many of us start to bank on luck at this time of the year. While luck might get you to the end of the rainbow on some things, we wouldn’t recommend that you lean on luck when it comes to non-existent, outdated or incomplete employment contracts.
The Consequences of Leaving it up to Luck
First, in case you’re new here or need a quick refresher, employment contracts are often recommended by lawyers and adopted by employers to bring a level of certainty to the employment relationship. Employment contracts can achieve a variety of things but generally, they set out the responsibilities and expectations of the employee and employer. If the employment relationship is bound by provincial employment standards legislation (it usually is), then the contract has to, at the very least, uphold the minimum standards of the applicable legislation.
If your employment contract runs afoul of the applicable employment standards legislation by failing to uphold the minimum standards as required by the law, your contract could be deemed unenforceable. Contracts could also be found to be unenforceable if they fail to comply with the principles of contract law.
So What Happens if a Contract is Unenforceable?
Well, all that certainty you hoped to bring to matters like what an employee is owed upon termination will be out the door and substituted with what a judge finds to be reasonable in the circumstances.
In Celestini v Shoplogix Inc., the Ontario Court of Appeal recently concluded that the failure to update an employment contract following major changes to the employee’s duties and responsibilities rendered that contract unenforceable. The contract promised 12 months of base salary, continued health benefits for that period and a pro-rated bonus amount upon termination without cause. The employee was terminated without cause and the employer sought to rely on the contract and the amounts it promised in the case of termination. Having determined that the contract was unenforceable, the Court awarded the employee a total of 18 months of base salary (an additional 6 months than what was promised by the contract), continued benefits for the 18-month period and a portion of the bonus. Now that we know the consequences of this case, let’s turn to how the employer got here.
Making Fundamental Changes to an Employee’s Roles and Responsibilities
Following some changes to the structure of the business, the employee signed a new contract in 2005. As is typical with an employment contract, the employee’s duties and responsibilities in their position were outlined. Following additional restructuring to the company, the employee’s duties, workload and responsibilities increased substantially and represented a major departure from the duties and responsibilities outlined in the 2005 contract.
The Court found that these new responsibilities were substantial, far exceeded any predictable change to the role that the employee could have reasonably expected and that ultimately the role the employee was fulfilling fundamentally changed after the 2005 contract was signed. The Court found that given this fundamental change, it would be inappropriate and unfair to apply termination provisions to circumstances that were not contemplated when the 2005 contract was signed.
How to Avoid this Outcome
The Court in Shoplogix gave employers some important takeaways to consider before implementing changes to an employee’s role which could essentially constitute a new role for the employee:
- Acknowledge these changes and the applicability of the original employment contract as the changes occur (for example, by re-affirming the contract in updated compensation documents as they are provided or by introducing a new contract in a legal manner)
- Implement contracts which acknowledge that the terms of the contract apply notwithstanding any changes to the employee’s responsibilities
One final note: The employee was dismissed without cause on March 2, 2017. It took about 4 years for a decision to be rendered and 2 more years before the Ontario Court of Appeal weighed in. The Ontario court process is lengthy and costly. A strong and legally defensible employment contract can at the very least help an employer hopefully avoid this process altogether.
Think Enforceability Sounds Complex? it can be – Get in touch!
We recognize that a discussion of the enforceability of an employment contract can be complex. The truth is, crafting a legally enforceable employment contract can be complex and failing to do so can have serious and costly consequences for your business.
To do a deeper dive into employment contracts, check out our most recent webinar, in which we outline tips to reduce your risk and carry out a contract audit.
If you are interested in implementing, updating or having a lawyer review your employment contracts, please get in touch with one of our lawyers – we love the complex stuff!