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Why use employment contracts

November 13, 2002
by Israel Foulon LLP

Employers have nothing to fear from employment contracts

Employment contracts are becoming a more common means of clarifying many of the terms of the employment relationship. A written contract which is finalized prior to the start of the employment relationship allows the employer and the employee to negotiate terms at a time when they are most optimistic about their relationship and, therefore, more likely to be fair with one another.

The written contract will provide answers to questions that often plague employment relationships such as: What is the vacation entitlement? How much notice is required before termination? Can the employer alter the employee’s sales territory? A proper employment contract will address issues like these and many others.

Although more and more employers are hiring with written employment contracts, some employers oppose using them. Their main fear seems to be that a written contract crystallizes the relationship, thereby reducing the employer’s right to make changes. These are legitimate concerns that can be addressed in the contract itself. A written contract can, in most circumstances, provide greater flexibility to the employer.

The content of an employment contract is limited only by the creativity of the parties and certain statutory restrictions which protect employees (such as human rights, minimum employment standards and health and safety.) Employment contracts should include the following:

  • Set out obligations. The contract must use language that clearly sets out the parties’ obligations. Ambiguous contacts will be interpreted by judges against the party who has drafted the contract.
  • Indefinite time period. Unless hired for a specific job or for a specific time period, employees should be hired for an indefinite time period. In many cases employers are too busy to ensure fixed-term contracts are renewed. If the contract lapses, and is not renewed, the employee’s legal rights may be greater than those which were initially negotiated.
  • Written contract supersedes previous contracts. The written contract will be the essence of the employer-employee relationship. It must clearly state that any previous verbal or written representations are replaced by the written employment contract. This point is particularly important if the employer enters into an employment contract with an existing employee. For example the current employee may have been promised a termination package by a former manager.
  • Probationary period. A probationary period is an excellent way to ensure the candidate is right for the position. The contract must use clear language which sets out the concept, and the length, of the probationary period. Six-month probationary periods are becoming the standard. In Ontario, for example, this will permit the employer to terminate the contract during the first three months without notice and without termination pay. If an employer in Ontario terminates the contract during the next three month period, the contract must provide for at least one-week’s notice or one-week’s pay in lieu of notice.
  • Termination. The contract should provide that an employer may terminate the employment at any time, without notice or payment in lieu of notice, for any cause recognized at law.
  • Future amendments. Properly drafted contracts that provide for termination and severance pay in accordance with minimum employment standard provisions are enforceable. This is the case regardless of the employee’s position and length of service. But an employer should anticipate that there may be amendments to these laws. Future amendments to these minimum standards should be contemplated in the contract. By limiting exposure to the employment standards provisions an employer can eliminate the problems associated with determining the length of the reasonable-notice period upon termination.
  • Employee’s duties. The employment contract should detail the employee’s duties, either in the body of the contract or attached as a schedule. A schedule is recommended if a substantial part of the employee’s duties will frequently change. Instead of signing a new contract each time the duties change the parties can initial a new schedule. The employer can also include the right to amend the employee’s duties, territory or customers even if the amendment reduces the employee’s remuneration. The employee should agree that such changes will not amount to constructive dismissal even if her remuneration is affected.
  • Confidential information clause. Employers should include provisions that will protect them after the employee leaves employment. Every contract should include a confidential information clause which establishes the employee’s duty not to disclose or use confidential information. Confidential information should be defined to fit the workplace and the type of information available to the employee.
  • Protecting secrets. It may be appropriate to include a clause that would protect any trade secrets or inventions developed by employees in the course of their employment. A clear statement that any such invention remains the property of the employer may be appropriate.
  • Non-solicitation agreement. A non-solicitation agreement is another essential clause where employees have access to customers and suppliers. These clauses protect the employer if the employee leaves to work for a competitor. The clauses will give the employer a remedy against the former employee and the new employer if they approach employees, customers and suppliers.
  • Non-competition clause. Non-competition clauses are extremely complex. A valid non-competition clause would prohibit a departing employee from competing with the employer in any manner for a period of time within a specified territory. Judges are often reluctant to enforce these clauses because they may interfere with an individual’s right to earn a living. Judges may make an exception and enforce the non-competition clause where it is reasonable in terms of time, subject matter and geographic scope and where the reasonable business interests of the employer could not be properly protected without one. The inclusion of such clauses in the contract should be discussed with the employer’s lawyer in cases where the employee could seriously disrupt the employer’s business if they began working for a competitor (such as a senior executive with specific knowledge of future plans.)
  • Vacation. Vacation entitlement, as well as restrictions on the carry over of unused vacation days and the employer’s right to approve requested vacation times, should be included. A written contract also allows the employer to institute a policy whereby vacation entitlement increases with tenure.
  • Sick days. Details regarding the employee’s rights to sick days, to be paid out for unused sick days and the obligation to provide a doctor’s certificate can also be addressed. Such clauses are important to avoid problems with frequent absences and malingering.

Employment contracts can enhance the employment relationship, create certainty in that relationship, limit the exposure of employers and provide additional flexibility.

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@qtw38575.mywhc.ca. A version of this article originally appeared in the Carswell publication, Canadian Employment Law Today.



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.