Properly implemented employment contracts save money

January is a great time of year for employers to focus on the basics of the employment relationship.

January is a great time of year for employers to focus on the basics of the employment relationship.

A cornerstone of that relationship is a properly implemented, written employment contract.

One of the key rules about employment contracts is that (to use the legal term) there must be “consideration” flowing to the employee in exchange for accepting the employer’s terms.

This consideration must exist in order for the employment contract to be binding on the employee.

Typically, the consideration flowing to a new employee is the offer of employment itself.

Timing is one crucial aspect of the exchange of consideration. If the employment has already commenced when the employer seeks to have the employee enter into a written employment contract, there is no new consideration flowing to the employee.

As such, it is crucial that employers routinely have new employees enter into written employment contracts prior to the commencement of the employment.

The principle that employment contracts must be signed before the employment commences was demonstrated a few years back in a decision of the B.C. Supreme Court.

The case involved a claim for wrongful dismissal by an employee who had been terminated after 16 years of employment.

The employer sought to rely upon a severance (pay in lieu of notice) clause contained in an employment contract signed just days after the employment had commenced.

If the severance clause in the written contract had been enforceable, the employer would only have had to provide the employee with six months’ pay in lieu of notice.

If the severance clause wasn’t enforceable, the (usually) greater common law standard of reasonable pay in lieu of notice would have applied.

The court reviewed the circumstances of the employee’s hiring, 16 years earlier, and of the signing of the employment contract. Of significance was the court’s conclusion that the written employment contract contained provisions which were detrimental to the employee (relating to termination, intellectual property rights, and restrictions on competition) and which had not been discussed before the employment commenced.

The court considered whether or not any new consideration had been provided to the employee for signing the written contract after the commencement of the employment. It concluded there had been none.

The court struck down the written employment contract and imposed the common law standard of pay in lieu of notice. The employee was given 13 months’ pay in lieu of notice (an additional seven months’ pay over what had been provided in the written contract).

What lesson should employers take from decisions such as this?

That there is a correct way to implement written employment contracts in relation to new employees and this must be followed if contracts are to be binding on the employee.

The contract must be delivered to the candidate prior to the date on which she is to commence employment.

An accompanying cover letter should state simply that the individual is being offered employment on the terms and conditions set out in the contract and that she can signify acceptance of those terms by returning the signed and witnessed contract.

The cover letter enclosing the contract should not contain any offers or suggestions of additional, or different, terms than those set out in the contract.

Any other documents referred to in the body of the contract (such as, for instance, a job description, policy manual, or benefits summary booklet) should be attached to, or included with, the contract when it is delivered to the employee.

The candidate should initial each attachment to indicate his receipt of that item at the same time as the contract.

Most importantly, the contract must be accepted, by way of the candidate signing and returning the document, prior to the commencement of provision of employment services.

Following these simple rules will ensure the enforceability of written employment contracts for new employees. And, they will save your business a lot of money.

Robert Smithson is a labour and employment lawyer, and operates Smithson Employment Law in Kelowna. This subject matter is provided for general informational purposes only and is not intended as legal advice.

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