Top 5 Mistakes Employers Make in their Contracts

1. It offends the Employment Standards Act

Section 5 of the Employment Standards Act (“ESA”) prohibits employers from waiving or contracting out of any of the employment standards prescribed in the ESA, except to provide a greater benefit to the employee. Any such contracting out is void.

Typically, the area of concern in an employment contract which attracts the attention of section 5 of the ESA is the termination clause (a termination clause allows employers to set a different notice period than that of common law reasonable notice).

Usually, a termination clause is unenforceable for the following 3 issues:

1. if it provides less notice than the ESA;
2. if it provides for no statutory severance on top of minimum notice; and
3. if it fails to provide the same benefits during the notice period that the employee would be entitled to had they still been working.

If the termination clause is unenforceable then the employee is entitled to common law reasonable notice of termination rather than the prescribed amount of notice as stated in the contract.

2. It lacks consideration

To be enforceable, a contract requires 3 key ingredients: offer, acceptance and consideration. Sometimes, however, employers fail to provide necessary consideration for a contract, especially where the employee has already worked for the employer and is given a new contract to sign with different terms and conditions.

Consideration means something bargained for and received by a promisor from a promisee.  Common types of consideration include money or labour. In other words, to form an employment contract, both the employee and the employer have to give something up. For new employment contracts, this is mostly not an issue – the employer promises to pay the employee and the employee promises to work.

However, where an existing employee already has a contract, and the employer wants to give that employee a new contract for whatever reason (often to provide a termination clause), the employer occasionally fails to provide “fresh” consideration. That is, the employer fails to provide something new, like a raise or increased benefits, in exchange for the employee agreeing to the new (and often harsher) terms and conditions of employment.

3. It contains overly broad restrictive covenants

Restrictive covenants, including non-solicitation and non-compete clauses, must be reasonable, otherwise they will be unenforceable.  This means they must not be overly broad restraints on trade or future employment. Therefore, restrictive covenants should be limited in time, territory and scope. A solid restrictive covenant will limit employees to non-solicit and non-compete periods of less than one year, and to just one city, and even to a set of a specific employers.

Moreover, employers should be aware that a non-compete covenant should not be too long for another important reason. The presence of the non-compete covenant can lengthen the reasonable notice period an employer must pay an employee upon termination. Because a non-compete covenant prevents certain employment, it is inferred that a non-compete covenant will make it harder to find comparable employment and mitigate one’s damages, which is the key question the courts consider in determining the length of the reasonable notice period.

4. It is ambiguous

The courts have consistently held that employers must communicate clearly in the contract what it is intending to do. If an employer does not use unequivocal, clear language and instead drafts an ambiguous clause in the contract, the courts may find that clause to be unenforceable or interpret any ambiguities strictly against the employer’s interests.

An example of an ambiguity in an employment contract is a termination clause which fails to explicitly state the employer is entitled to “minimum” notice “only”. Courts have consistently found that a termination clause was ambiguous because it did not explicitly oust the right to common law reasonable notice. Rather it just stated that the employee was owed “applicable” employment standards notice, without stating the employee was owed applicable employment standards notice “only” or something to that effect.

5. It contains a fixed term

Employers should almost never use fixed term contracts. They could be on the hook for months or even years of having to pay wages to an employee without her having to work or even look for work (i.e. attempt to “mitigate” her damages). This is because if the employment contract contains a fixed term, and the employee is terminated before the end of the fixed term, the employee is entitled to the balance of the fixed term contract, unless the contract had an enforceable termination clause limiting such a windfall.