What is an Employment Agreement?

In Ontario, all employment relationships are contractual whether or not a written employment agreement is signed. Any time an employment relationship is commenced, an employer and employee have an “agreement” to perform things (e.g. employee promised to conduct labour, and the employer promised to pay wages). There doesn’t even need to be a verbal agreement to form an employment agreement in Ontario. An employment agreement is instantly implied as soon as the employment relationship is formed here in Ontario.

When there is no written employment agreement, and instead there is an implied employment agreement, then the terms and conditions of employment will be governed by employment law legislation like the Employment Standards Act and the Human Rights Code and the common law. For example, the Employment Standards Act will imply into the employment agreement the right to overtime pay for non-managers and the common law of employment will imply the right to reasonable notice in case of termination for all employees.

In light of the relatively generous rights of employees made pursuant to the common law, most employers in Ontario require their employees to sign written employment agreements prior to commencing work. A written employment agreement can limit or displace the common law entitlements implied into an employment relationship.

Benefits of Employment Agreement

The benefits of written employment agreements include, but are not limited to:

• defining the job description and duties expected of the employee;

• providing for a probationary period for new employees;

• specifying termination entitlements;

• setting out and/or referencing internal policies regarding expenses, benefit plans and other perquisites affiliated with the employment relationship;

• confirming, where appropriate, obligations of non-disclosure, non-solicitation and other restrictive covenants;

• clarifying all aspects of the employee’s compensation, including base pay, bonuses, commissions and the like. Furthermore, a written employment contract could benefit the employee in providing extended vacation, parental leave benefits (including a top-up during such leave) and rights to notice or pay in lieu of notice at termination that are greater than employment standards minimums;

Nevertheless, the main benefit to a written employment agreement is the setting out of the explicit expectations of both the employee and the employer such that uncertainty may be avoided.

For more, see my textbook, Canadian Forms & Precedents – Commercial Transactions – Employment, Chapter 2 Written Employment Agreements, to which I reproduced some of this above content.  

Form of Employment Agreement

An employment agreement can be a simple offer letter or a more complex multi-page contract. You can see some of the more important topics to include in a more complex employment contract here.

Are Employment Agreements always Enforceable?

Employment agreements are generally enforceable unless there is a specific defect that makes them unenforceable, including, but not limited to:

• Lack of consideration (a new promise of something of value for a new promise of something of value). Employees should note that they must be given an employment contract to sign at the start of a new job, and not be handed one later down the road. Contracts that are given to employees after they have started working are unenforceable unless they are given side by side with a promotion or some other monetary reward.
• Failure to comply with employment standards (see Machtinger v. HOJ Industries Ltd.), where the Supreme Court of Canada voided a termination clause in an employment agreement for its failure to meet minimum the Employment Standards Act minimums.
• Unconscionability
• Undue influence and duress
• Removal of substratum (i.e. when, over time, an employee’s position, responsibility and remuneration change so significantly).
• Frustration (i.e. prolonged impossibility to perform the employment agreement. However, this is rare).

If an employment agreement or a specific term in an employment agreement is found to be unenforceable, then the paper agreement will be instead replaced by a common law employment agreement in favour of the employee.

Important Employment Agreement Points

Written employment agreements in Ontario are generally written in favour of employers to displace an employee’s common law entitlements. Nevertheless, as discussed above, if the parties do not sign a written employment agreement, they should know that they still have an implicit employment agreement with each other, but that they are bound to employment standards and the “common law” rather than explicitly defined terms and conditions. This is generally better for employees, and worse for employers because the common law gives employees rights that employment contracts usually take away (i.e. the right to reasonable notice of termination).

The most important thing to look out for in an employment contract is a termination clause that limits the employee to notice of termination according to the Employment Standards Act’s minimums (i.e. one weeks’ notice per year of service) or something slightly greater than that. Employers are keen to insert a termination clause because then it prevents the employee from being entitled to notice upon termination according to the common law, which is much more lucrative than the Employment Standards Act’s minimums. In fact, the gap between the Employment Standards Act’s minimum notice and common law notice can be 96 weeks of termination pay.

The takeaway for employers: Consider getting your employees to sign employment agreements when they start work. An employment lawyer can draft an employment agreement for your company in less than a few hours, so the cost is negligible, especially when you consider what you could save on common law termination payments.

The takeaway for employees: Whenever you are asked to sign a new employment contract, consider getting an employment lawyer to review it. In particular, have a lawyer advise you on the proposed termination rights, restrictive covenants and bonus language. In addition, a good employment lawyer can advise on compensation generally. After all, most employment lawyers have seen thousands of contracts, and they know the market.