June 17, 2002

Tips for Getting it Right

Your employees are privy to sensitive information, but the company has no employment agreements in place to protect confidentiality or deal with terminations. Can you tell staff they must sign a written employment agreement that contains stringent confidentiality and termination provisions or they will be dismissed? Will the courts enforce agreements signed under those circumstances? The answer is yes…provided the proper steps are followed.

The terms of an employee’s oral employment agreement can be varied, and a new written agreement will be legally enforceable, as long as requirements for altering existing agreements under contract law are met. The three issues to consider when changing an existing agreement are: consideration, duress and reliance.

A recent decision of the Ontario Court of Appeal, in Techform Products Ltd. v. Wolda, examined the introduction of a written employment agreement in a case of intellectual property rights and an existing independent contractor.

Consideration

To vary an existing employment contract, new or additional consideration is needed. In Techform, the Ontario Court of Appeal found that continued employment coupled with an implied promise not to fire an employee for a reasonable period of time is sufficient consideration for entering into a new contract of employment with an existing employee. In Techform, a mechanical engineer signed an “employment technology agreement” that gave his employer the rights to any inventions he conceived of during his employment. The consideration listed in the agreement was the engineer’s continuing employment with Techform.

The agreement was signed in February 1993, when the mechanical engineer was no longer an employee of Techform, but an independent contractor/consultant (which he had been for approximately four years).

What prompted the implementation of the agreement was an invention called the “Boxless Hinge” which had been invented by the engineer and another Techform employee on their own time and without Techform’s knowledge. The engineer and the other Techform employee presented the invention to Techform’s president. After the presentation, Techform presented the agreement to the engineer and asked him to sign it. The engineer testified that he did not want to sign the agreement and took a couple of days to think about the matter. He then called his immediate supervisor and asked him if he wanted him to sign the agreement. The supervisor told him “yes.” The engineer testified that he had signed the agreement because he felt he had “no way out,” that he had to sign or he would be terminated by Techform.

After signing the agreement, the engineer took it back to the supervisor and told him it was “useless” since he did not agree with it and he was not an employee in any event. He had also placed a question mark beside the word “employee” on the agreement. When the supervisor did not comment on the engineer’s assertions or markings on the agreement, he assumed the supervisor agreed with him. The supervisor testified that had the engineer refused to sign the agreement, Techform would have given him 60 days’ notice of termination as per the engineer’s consulting agreement.

In 1996, Techform assigned the engineer the task of designing a “Tailgate Hinge.” Also, in 1996, the engineer invented (on his own initiative) a hinge called the “3D Hinge.” He billed Techform 1,000 hours of work related to the hinge and he received assistance from other Techform employees to refine its design. The engineer then requested an increase in his hourly rate and two cents from every hinge sold to be donated to a particular charity in exchange for assigning his rights to the 3D Hinge.

Techform, outraged by these demands, terminated the engineer’s contract and sued for a declaration that it was the owner of the 3D Hinge and the Tailgate Hinge and all rights, title and interest in the inventions.

At trial, the judge found the agreement was not binding on the engineer because there was no consideration, and it was entered into as a result of duress. The Court of Appeal however overruled the trial judge on both points. With respect to the consideration issue, the Court of Appeal found continued employment and an implied promise not to fire an employee for a reasonable period of time is adequate consideration. The Court relied on a 1935 Supreme Court of Canada case — Maguire v. Northland Drug Company Limited for this premise (see sidebar, "What the courts are saying" below).

Duress

Duress may occur if there is a threat of termination of employment for a refusal to sign a new employment agreement. Any agreement signed under “duress” makes that contract voidable at the option of the party subjected to duress.

Courts have also recognized the concept of “economic duress” in the form of a threat to employment. This means that an employee feels pressure to sign an employment agreement because he cannot financially afford to lose the job.

In the Techform case, the Court of Appeal found that the “employment technology agreement” was not signed under duress for a variety of reasons.

  • The employee was an independent contractor and therefore the company could have insisted on the agreement as a condition for renewing the consultancy agreement.

  • The company believed it was entitled to ownership of inventions by its employees and consultants. Techform believed it was putting into place a more formal agreement that was already implied to be in place. The trial judge, in fact, did find that Techform owned the rights to any new products specifically assigned to the engineer for design. It was considered to be an implied term when the engineer was an employee and in his consultancy agreement.

  • The engineer was not forced to sign the agreement immediately. He was given the opportunity to take the agreement home for consideration. He also had the opportunity to seek independent legal advice.

  • The engineer never sought a revised agreement, nor attempted to repudiate the agreement at a later date, nor did he seek independent legal advice after the fact.

Reliance

Even if a court finds that there is insufficient consideration for implementing an employment agreement with a current employee, it remains open to the employer to argue reliance. This operates as a defence to allegations by the employee that the agreement is unenforceable. For example, if the employee has verbally led the employer to believe that the employee has agreed to a variation in the terms of employment, then that employee cannot raise an objection to the variation at a later date. But, the employer cannot simply have the employee sign the agreement, file it in the personnel file and not refer to it again. The employer must be able to prove reliance on the agreement. This means the employer must make it clear from time to time (preferably in writing) that it is relying on the terms of the written agreement.

Alternatively, if the employee consistently disputes the enforceability of that written agreement, the employer will have difficulty claiming it relied on the employee’s implied representation to be bound by the agreement.

Again, in Techform, the Court of Appeal did not consider a reliance argument put forward by the employer as the Court found there was sufficient consideration and no duress. The Court did find though that the employer did not repudiate the agreement and therefore the engineer’s obligations under the agreement did not end with its termination. The Court also found the employer consistently insisted throughout the term of the agreement that the engineer continue to honour his obligations under the agreement.

So, judging from the preceding examples, it is possible to implement a written employment agreement that constitutes a variation of the existing employment agreement, provided it is done carefully, fairly and reasonably.

What the courts are saying…

In the case of Techform Products Ltd. v. Wolda (2001) 206 D.L.R. (4th) 171 (Ont. C.A.), the judge referred to two previous decisions.

  • In Maguire v. Northland Drug Company Limited, the employer required the employee (a pharmacist) to sign a bond 11 months after his employment commenced. The bond was essentially a non-compete extending for five years after termination of employment within a 25-mile radius of the city where the pharmacist was employed. At trial the pharmacist testified that he understood that if he did not sign the bond, he would be terminated. The Supreme Court of Canada found that there was sufficient consideration, namely the implied promise that if the pharmacist signed the bond, his employment would not soon be terminated. The pharmacist’s employment was terminated three years after signing the bond. The Court held that the non-competition covenant was enforceable. Maguire v. Northland Drug Company Limited [1935], S.C.R. 412.

  • In Techform, the Ontario Court of Appeal also distinguished a case from the British Columbia Court of Appeal — Watson v. Moore Corp. The distinguishing feature of Watson was that the employment contract sought to reduce the employee’s payment in lieu of notice for dismissal without cause. The B.C. Court of Appeal found that the continuation of the employee’s employment itself was not sufficient consideration as there was no implied promise not to fire the employee and the contract purported to reduce the employee’s entitlements upon dismissal without cause. Watson v. Moore Corp. (1996), 143 D.L.R. (4th) 252 (B.C.C.A.).

Employment agreements for existing employees

To assist with the implementation of new employee agreements, here are a few key steps to get started on the right track.

  • Provide the employee with reasons for your decision to implement written agreements and a copy of the proposed agreement, and allow him sufficient time to review it.

  • Suggest that the employee obtain independent legal advice.

  • Advise the employee that if he fails to sign the agreement, employment will be terminated with reasonable notice (or payment in lieu) as required by law.

  • If the employee refuses to sign, give notice of termination of employment. Do not make exceptions. Consult your lawyer before acting.

  • Try to introduce employment agreements at a time when the terms of employment are going to change. This allows an employer to make use of the change in employment terms (such as a promotion or benefits change) as consideration for the employment agreement.

Peter Israel is the senior partner in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. He can be reached at 416-640-1550 or pi@israelfoulon.com. A version of this article originally appeared in the Carswell publication, Canadian HR Reporter. . The author gratefully acknowledges the assistance of Chris Foulon and Donna Clark in the preparation of this article.

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

Notable Events

Latest Legal Articles