How to Change Employment Contracts

Anytime you ask an existing employee to sign a new employment contract, it’s important to proceed cautiously. There are risks and pitfalls that wary employers may wish to avoid when making a change to their employment contracts. A misgauged approach may result in an unenforceable contract, or worse, result in a costly claim of constructive dismissal. As set out below, the Ontario Courts have clarified generally two methods to change employment contracts. The first method is for when an employee consents and agrees to the changes, and the second is how to change employment contracts when the employee refuses.

Why have Employment Contracts at all?

If you terminate an employee “without cause” you must provide them with reasonable notice or pay-in-lieu of notice. In the ordinary course, the length of notice is dictated by the ‘common law’ (judge made law). In deciding the length of notice, the Court considers: the character of their employment; length of service; age; and availability of similar employment for that particular individual (having regard to the employee’s particular experience, training, and qualifications). The stated goal of the Court is to estimate how long it will actually take that person to find another job. In reality, the Court compares what similar people in similar situations have been awarded. Ordinarily, awards fall in the range of 3 to 24 months. The reasonable notice awarded at common law is significantly greater than the minimums set out in the Ontario Employment Standards Act (the “ESA”), which is usually measured in a matter of weeks, not months.

You can learn more about ‘Reasonable Notice’ and what the appropriate length is for different employees in my earlier article on the topic.

To avoid “common law reasonable notice”, employers may contractually limit the amount of notice employees are entitled to receive. Employment contracts cannot, however, limit an employee’s entitlements on termination to less than the minimums set out in the ESA. This works in theory, but the problem is in execution. The law in Ontario is very favourable to employees, who the Court considers vulnerable. Any problems or ambiguities in the contract get resolved in favour of the employee. To distil the matter down, and remove all nuance and complexity, the principle is this:

If an employment contract can be interpreted in some way to provide less notice than the minimums prescribed by the ESA, then the Court will likely ignore the contract and award common law reasonable notice.

In short, it is important to appreciate that there is no way to guarantee with perfect certainty that a contract will safeguard your organization from an award of common law reasonable notice. The Courts are a risky, uncertain gamble.

Employment Contracts Mitigate Against Risk

A properly drafted employment contract is an insurance policy against the risks of employment by reducing the costs associated with termination. It is also easier to budget for turnover if you can more accurately predict what those costs will be. An employment contract may dissuade potential claims for wrongful dismissal and if, or when, litigation is commenced, the contract is leverage for a smaller, faster, more cost-effective settlement. In essence, by creating and updating expertly drafted employment contracts, you trade large, unexpected, sudden liabilities into smaller more predictable payments over time.

Implementing Changes to Employment Contracts

Where the terms of employment are being changed in some significant way, the Court calls this a “fundamental change”. Examples of fundamental changes include, among others, a reduction of hours or salary, geographical relocation, or a significant change in the roles and responsibilities of an employee. Where a fundamental change to employment is instituted unilaterally, the employee may quit—but is deemed to have been fired—and sue for wrongful dismissal. This is constructive dismissal and one of the pitfalls employers must avoid when making changes to employment contracts.

Plan A: Offer a Signing Bonus

The first approach to implementing or changing an employment contract is to obtain the employee’s consent. Consent should almost certainly be obtained in writing and after providing the employee an opportunity to review and consider the new employment contract. Consent is not enough, however. In order for the new or revised contract to be legally enforceable, there must be an exchange of valuable consideration. Without going into the technicalities and long history dating back to every law students favorite Judge, Lord Denning, it suffices to say that the employee must be provided something in exchange for agreeing to the new terms of employment. Often this is a monetary signing bonus or raise. Consideration is also a helpful way in getting an employee’s consent in the first place. For example:

Jay, the company is making some administrative changes and looking to implement written employment contracts for all our employees. Because you’ve been with us for 9 years without a contract, we want to offer you a one-time bonus of a month’s pay and give you an extra week of vacation every year. We’ve set all this out in our new contract. Take it home, give it a read, we’re asking everyone to return it signed before the end of next week.

Plan B: Notice of Unilateral Change

If an employee refuses to consent, a second approach may allow an employee to implement unilaterally a fundamental change to the employment contract. Plan B can be risky and will almost certainly create friction with some employees. The process may be gleaned from a line of cases stemming from Wronko v Western Inventory Services Ltd. 2008 ON CA 327 and then Kafka v Allstate Insurance Company of Canada, 2012 ONSC 1035. In Wronko, the Court set out the procedure for implementing unilateral changes (which the employer failed to follow in this case). Kafka summarizes the key advice for employers, acknowledges the process in Wronko and confirms the principal that “a fundamental change does not amount to a constructive dismissal where the employer provides the employee with reasonable notice of the change.” The take away from these decisions is that employers may be able to make unilateral and fundamental changes to an employment contract by:

1. providing sufficient reasonable notice of the proposed changes to the employment contract equal to or greater than their entitlements either at common law or pursuant to a valid employment contract;
2. informing the employee that the changes are mandatory, that his/her employment will not continue under the existing terms of employment at the end of the reasonable notice period;
3. offering re-employment under the terms of the new or revised employment contract; and,
4. ensuring no fundamental changes are made in the interim period.

Conclusions

It is prudent for an employer to implement and update their employment contracts. The consequences of not doing so are expensive. This can be accomplished in one of two ways, the first being to get employees’ consent and provide consideration for the change. The second is to give working notice of the change and implement that change upon the conclusion of the notice period. The former is less risky, keeps employees happier and has a long legal history of being appropriate and permitted. The latter has been approved and endorsed by the Court for the past number of years but is likely an area which the court may revisit at some point in the future to uncertain effect. In addition, it may create animosity in the workplace. The information provided in this article contains general legal information only. If you are thinking of implementing changes to your employment contracts, it is critical that you speak to an employment lawyer and obtain advice tailored to your specific circumstances. If you are an Ontario employer and are thinking about speaking to an experienced employment lawyer, Justin W. Anisman, at Brauti Thorning Zibarras LLP, would be happy to service your organization or business.