12 things to consider when drafting an employment contract
The relationship between an employer and an employee is an important one. Creating a strong employer-employee relationship that protects everyone involved starts with defining the duties and obligations of both parties. Employment law governs these relationships with contracts and legislation, such as Alberta’s main statute, the Employment Standards Code, which sets the minimum standards employees are entitled to.
Before you start the hiring process consider these 12 elements when drafting your employment contracts.
1. Elements of the Contract
Employment contracts must include these three elements to be valid:
- An offer;
- Acceptance of the offer, and
Consideration is the promise of employment. When forming employment contracts, it’s important for employers to understand that, in order for a contract to be binding employees cannot sign employment agreements on their start date or anytime thereafter. Furthermore, if an employee has already started working but hasn’t signed the written employment agreement fresh consideration must be provided. New considerations can include anything from a signing bonus to a raise, so it’s imperative you receive the signed contracts in advance. Additional consideration must also be given if an employer seeks to change an employee’s contract terms (more on that below).
Courts interpret employment contracts through a specific lens. Judges determine reasonable expectations of both parties based on compatibility with the terms of the original contract. To avoid bias, the Courts attempt to ascertain the true intentions of the parties when reading contract provisions by taking the entire contract into consideration. The Courts tend to interpret discrepancies or inconsistencies in contracts in favour of the employee as they typically have less negotiating power and didn’t draft the contract.
3. Employment Standards Code
The Employment Standards Code is Alberta’s primary piece of employment legislation, responsible for setting the minimum requirements an employee is entitled to during their employment. If a contract violates minimum requirements such as overtime, vacation, termination, child labour, etc. during the period of employment it is at risk of being unenforceable.
There are two types of termination: without cause and with cause.
- Without cause:
- If an employee is terminated without cause they are entitled to reasonable notice or termination pay in lieu of notice (severance pay).
- With cause:
- If an employee is terminated with cause such as committing an illegal act or being insubordinate the employee is not entitled to severance pay.
Termination is governed by the employment contract, the Code and common law. The Code sets the minimum standards an employee is entitled to and the common law various factors to determine a reasonable notice period (more on reasonable notice here). Reasonable notice periods are often longer than the time prescribed in the code. For this reason, termination provisions should be in all employment contracts, allowing the employer to limit reasonable notice terms and limit employee severance to the minimum amount prescribed in the Code. It’s important to note that employers who include termination provisions in their agreements must avoid the use of ambiguous or unclear language which could result in an unenforceable termination provision. If deemed unenforceable the reasonable notice period is calculated based on common law principles.
5. Temporary Layoffs
Temporary employee layoffs are governed by the Code, allowing employers to temporarily lay off employees for 60 days in a 120-day period, without terminating them. This means employers are not required to pay severance nor a wage for up to 60 days (more on temporary layoffs here). While the Code permits temporary layoffs, in some cases employees are still entitled to bring a claim for constructive dismissal and seek damages unless the potential for temporary layoffs is contemplated in the employment contract. Therefore, we recommend including a temporary layoff provision in employment agreements stating that the employee is aware of and consents to the potential for temporary layoffs.
Frustration of employment contracts means that something beyond reasonable human foresight has occurred preventing a party from fulfilling their terms off the contract. For example, if a roofer is paralyzed in a car accident and cannot work the contract would be frustrated. Should an employment contract become frustrated, both parties are relieved from contractual obligations meaning that an employer is not required to provide the employee severance pay. While sometimes used as an excuse to avoid paying their employees reasonable notice for trivial inconveniences such as routine illnesses or injury, the concept of frustration is defined narrowly to prevent such abuse. Some examples of frustration include:
- Loss of professional qualifications;
- Permanent disability; and
- Long term prison sentences.
Examples of when a contract is not frustrated include:
- An employee refusing to work because they believe it may endanger their health;
- Strikes and labour unrests; and
- The employer’s poor economic conditions.
7. Fixed-term Contracts
Most employment contracts either include a particular end date (a fixed-term contract) or do not (an indefinite term contract). Employees hired on a fixed-term basis may be entitled to compensation for the entire length of the contract, should the employer wish to terminate the employee before the term expires. To avoid a fixed-term contract employer can state there is an anticipated end date caveat in the agreement.
In the event that an employee continues to work with the approval of the employer the fixed-term contract will then be classified as an indefinite contract and the employee would be entitled to reasonable notice.
8. Verbal vs Written Agreement
Employment agreements do not have to be in writing to be enforceable. If a verbal fixed-term agreement is in place and term are greater than one year the Statute of Frauds will apply to make the contract unenforceable. This excludes verbal employment agreements that are indefinite in nature. Therefore, if you plan on hiring an employee on a fixed-term basis with terms extending beyond one year the employment agreement should be in writing.
Employers have the ability to include probationary periods at the beginning of an employment term. If probation provisions are excluded from, or not agreed to, in the employment contract prior to the first day of employment the Courts will not recognize them.
10. Variations to Employment Contracts
There may come a point during the employment where an employer wishes to change the terms, such as a material change in their job description. Any variations made to existing agreements require new or additional consideration or may be deemed unenforceable. Examples of new considerations include:
- Providing a raise (excluding already guaranteed raises) if the employee is being promoted;
- A signing bonus; or
- Include a contract a provision that states the employment offer is conditional upon consenting and executing the terms of the agreement, prior to the employee starting.
All changes require the consent of the employer and the employee. If the employer decides to substantially change an important term of the employment agreement the employee may be entitled to bring a claim for constructive dismissal and seek damages against the employer (more on constructive dismissal). While not part of the employment contract per se, obtaining written consent in the form of a signature from the employee limits the risk to constructive dismissal claims.
11. Undue Influence and Duress
Employment contracts are not enforceable if the employee signs it under duress or is subject to undue influence that would vitiate the employee’s consent. Consent to the terms of the employment contract must be given freely, voluntarily and in full. If consent is obtained through abuse of authority or coercion the contract is unenforceable.
The most common form of duress pertaining to employment contracts is economic duress Economic duress is the recognition that someone can be pressured into something due to economic forces that are to such an extent that the employee has no choice but to sign the contract. To determine if economic duress was present the Courts consider the unequal bargaining power between the employer and the employee. Contracts written to heavily favour the employer may indicate that employee consent was obtained under duress due to economic need and the contract may be unenforceable.
12. Restrictive Covenants
Non-competition and non-solicitation clauses (known as restrictive covenants) are not enforceable unless the employer proves that restrictive covenants are required to protect proprietary interest, and covenants are clear and reasonable. To be recognized as reasonable, employers must consider how long employees are bound by the covenant, prevented from competing, the activities in which they are prevented from engaging in and the geographical scope in which the restrictive covenant applies. Since these covenants generally survive the termination of the employment agreement the terms must be very clear and precise. If unenforceable the employee may solicit employees and clients, or start a competing business using the information they gained from their employment.
If you require any assistance or wish to learn more about employment contracts contact us today. Our team of legal professionals will be happy to help in any way we can.