Employment contracts

An employment contract is an agreement between an employer and employee that outlines the terms of their relationship, such as the employee’s salary and standard of service.

It should be noted that the relationship between an employer and employee is contractual even if no written document has been signed.

In Ontario, the relationship is governed by several statutes, including the Employment Standards Act, the Labour Relations Act and the Occupational Health and Safety Act. These statutes establish some basic conditions of the employer-employee relationship, such as an employee’s minimum wage, maximum hours of work and minimum notice for dismissal. Furthermore, the relationship is affected by common law rules, including rules dealing with unfair bargaining power and an employee’s duties of loyalty, confidentiality and good faith.

Nonetheless, many employers require prospective employees to enter into formal written employment contracts. Such contracts add a degree of certainty about the terms of the employer-employee relationship and are useful if any disputes about the employment arise.

Creating a valid employment contract

An employment contract, like all contracts, requires that each party provide consideration to be binding. Consideration is something of value, such as money, or, in the context of an employment agreement, the employer’s promise of a job and the employee’s promise to provide a service. Furthermore, such consideration must be provided at the time the agreement is made. An employment contract that is made with an existing employee will not be binding unless the employer provides additional consideration. A promise to continue to employ an employee is not valid consideration. However, a promotion or bonus that would not have otherwise occurred in the normal course of the relationship would be sufficient.

Another requirement is that an employment contract must be entered into voluntarily by the parties. The employer has the onus to show that the employee was able to negotiate without coercion or undue influence, particularly if some terms in the contract are harsh or restrictive. An employer might require a prospective employee to obtain independent advice to establish that the agreement was freely made. At the very least, the prospective employee should have sufficient time to read and understand the contract before being required to sign it.

Essential features of an employment contract

An employment contract must contain a number of features. This includes:

  • the names of the parties,
  • the date when the contract begins,
  • the contract’s duration, and
  • a description of the employee’s duties.

In addition, the contract should set out the employee’s rate of pay and how and when such payment will occur. An employment contract cannot violate the minimum statutory standards for minimum wage, timing of payment, maximum hours of work and payment for overtime.

There are also minimum statutory standards for notice of dismissal or payment in lieu of such notice. An employment contract should provide for at least as much notice as that required by legislation. If a clause breaches the statutory minimum standard for notice of dismissal, a court may replace the clause with the common law notice period, which is a much longer period than that provided by the current legislation.

Finally, an employment contract should outline a standard of performance which the employee is expected to meet and provide an employer with some flexibility to change an employee’s job description.

Restrictive covenants

Many employment contracts use restrictive covenants to protect the legitimate proprietary interests of an employer. Such clauses restrict the rights of a former employee to compete with their former employer and to disclose confidential information learned while on the job. The contract must outline the scope of information which is deemed to be confidential, the duration of the restrictions, and the geographic area which the restrictions cover. Furthermore, the restrictions must be reasonable, particularly in regards to geographic area and duration. An employer cannot restrict the right of a former employee to compete indefinitely.

When an employee’s position involves research or development, many employers use a clause in the employment contract which states that discoveries, improvements and other creative achievements by the employee during the course of the employment are the property of the employer.

In addition to these basic features, many employment contracts have more technical provisions that address the legal parameters of the contract. For instance, a clause might state that the contract represents the entire agreement between the employer and employee (which might prevent an employee from attempting to bind an employer to an oral promise that was not included in a subsequent contract).

Some other technical provisions sever an invalid clause from an otherwise valid contract and establish the jurisdiction for legal disputes about the contract.