Employment Agreements: Establishing the Rules of Engagement

The Importance of Formal Written Employment Agreements

When an employment relationship is established between a prospective employee and employer, this forms a binding agreement between the parties known as an employment contract. The employment contract sets out the terms, conditions and expectations of the employment relationship and its formation will occur whether it was formed through the acceptance of an informal verbal offer or through the signing of a formal written agreement.

The principal benefit of a formal written employment agreement is that it helps to provide clarity and certainty as to the nature of the employment relationship between the parties. In the absence of such clarity, gaps in the employment contract will be filled by implied terms, rights and obligations from the Employment Standards Act, among other statutes, and the common law. As you can well imagine, this may leave the parties, particularly the employer, exposed to a great deal of unforeseen liability and uncertainty in the event of any employment dispute.

Preparation of an effective employment agreement serves to frame and govern the mutual understanding between employer and employee as to the terms and conditions of the employment relationship. Accordingly, employers are strongly encouraged to rely on employment agreements as the critical culminating step of any hiring process.

Defining the Terms and Conditions of the Employment Relationship

With respect to drafting, it is important to note that the terms and conditions of an employment agreement should always be tailored to accurately reflect the nature and extent of the specific employment relationship. The fact is that there is no “one size fits all” approach to the preparation of employment agreements, and relying upon a standard form employment agreement could in certain cases represent an unnecessary and costly risk.

While the nature of employment agreements varies from employer to employer, what follows is a brief outline of commonly relied upon terms and conditions that should be contemplated:

(a) Term: Employers may elect to establish an indefinite or fixed term employment relationship with the employee. While there are practical applications to both approaches, there is often substantial risk associated with fixed term contracts when not properly drafted and administered. For many employers, it is advisable to rely on an indefinite or ongoing employment term coupled with a termination provision.

(b) Probationary Period: Employers may wish to stipulate that the employee is subject to a probationary period, which typically ranges from 3 to 6 months. Probationary periods can be helpful in clarifying that the employment relationship is subject to further assessment on the basis of an employee’s fit and competence.

(c) Position: Employers should clearly state the position being offered and set out the nature of the specific duties and responsibilities related to this position. Though employers may reserve the right to revise the nature of the position, a clear job description is fundamental to establishing the expectations related to the position.

(d) Work Schedule: Employers will often specifically outline the standard work day or work week hours for the employee, which may be subject to change depending on the nature of the position. Employers may also clarify the expectations and availability of overtime work hours.

(e) Compensation: Employers should specify in clear and certain terms the nature of the employee’s compensation structure, including salary/wages, healthcare/pension benefits, and commission/bonus incentives if available. Employers will also typically reserve the right to modify the benefits package, as may be needed, and to set out the expectations for promotions and payment increases over time.

(f) Restrictive Covenants: Employers may wish to rely on restrictive clauses that seek to govern the employee’s conduct during and following the period of employment. Though not always enforceable at law, such clauses are intended to ideally protect the business interests of the employer and may include clauses enforcing confidentiality, conflict of interest, non-solicitation, and non-competition.

(g) Layoff: Employers may establish a contractual right to layoff an employee subject to the temporary layoff guidelines in the Employment Standards Act. It is important to stress the fact that employers must retain the right to impose a temporary layoff. Otherwise, the layoff could constitute a constructive dismissal entitling an employee to notice/severance.

(h) Termination: Employers should give careful consideration to the drafting of an effective termination clause that clearly defines the employee’s entitlement to notice/severance upon the termination of the employment relationship. Typically, the termination clause will clarify termination expectations relating to when:

  • (i) an employee is terminated with “cause” for behaviour or actions amounting to gross misconduct;
  • (ii) an employee is terminated without “cause” and is entitled to notice/severance; or
  • (iii) an employee resigns from employment and provides the employer with notice of resignation.

Through the inclusion of a valid and binding termination clause, an employer may limit an employee’s notice/severance entitlements to the statutory minimums under the Employment Standards Act. Otherwise, the employee is entitled to the full extent of employment rights under the common law, and this could entitle the employee to substantial reasonable notice/severance quantified on the basis of age, length of service, and position, among other factors, at the time of termination.

Guidelines for Employers and Employees

Upon the formation of an employment relationship, employers and employees should strive towards fully clarifying the terms and conditions of the relationship through the implementation of an effectively drafted employment agreement. Though there is no substitute for reviewing this topic with employment law counsel, the following recommendations provide valuable guidelines.

Employers should consider the following when preparing an employment agreement:

  • an employment lawyer should be retained to assist with the drafting and review of employment agreements, which will help to ensure that the agreement is valid, enforceable, and wholly compliant with applicable employment legislation;
  • employment agreements should be specifically tailored to the prospective employee, and, importantly, should be introduced during the hiring process for the employee’s careful acceptance before the commencement of active employment;
  • amendments to the employment agreements of existing employees will require fresh consideration, such as enhanced pay or benefits, in order to form a valid and binding contract between the parties; and
  • though limiting termination clauses may be used to reduce exposure to substantial notice/severance upon termination, and restrictive covenants may be used to protect business interests, such clauses require careful drafting in order to be enforceable.

Employees should consider the following when reviewing a new employment agreement:

  • an employment lawyer should be consulted to assist with reviewing and understanding the terms and conditions of any new employment agreement prior to signing it, whether you are a prospective or existing employee;
  • detailed assessment of the proposed compensation package should be completed in order to ensure that your position reasonably reflects your total entitlements, including salary, benefits, vacation, commission, bonuses, and raises;
  • as employment agreements may include language that allows the employer to unilaterally change the terms of the employment relationship without triggering a constructive dismissal, it is advisable to renegotiate such terms if possible; and
  • careful consideration should be given to reviewing your proposed rights and entitlements under the employment agreement upon your termination, as such rights may be limited by a termination clause or other restrictive covenants.

The fundamental importance of the employment agreement in providing certainty as to the nature of the employment relationship should not be understated. As it serves as the governing rulebook for the employment relationship and any potential disputes, employers and employees alike should consult with an employment lawyer to address any employment agreement inquiries they may have.

Disclaimer: Information made available in this article is provided for general information purposes only and is provided without representation for its accuracy or completeness. It is not legal advice and should not be relied upon. You should not take any action or fail to take any action based on the information set out in this article or on this website.  Consult a lawyer at Sullivan Mahoney LLP and seek professional legal advice tailored to your unique situation.