Consider this scenario: You begin working with a company without signing an employment contract.
Ten years later, you’re handed an employment contract that contains a non-competition clause. The non-competition clause states that you cannot accept a job with a competitor company for one year post employment.
What are your rights as an employee when the terms of your employment contract are changed? Is a clause like this even enforceable?
What is consideration?
For any contract to be legally enforceable, there must be:
- An offer;
- An acceptance of that offer; and,
An offer and acceptance are relatively straightforward contractual principles. The “offer” is the employment offer, often set out in a contract (but it could have been made verbally) and its terms, given to the employee. “Acceptance” occurs when the employee unequivocally accepts the terms of an offer made by an employer. But “consideration” is a trickier concept.
Consideration was defined by the Ontario court over 70 years ago as something that is promised or given for the benefit of one individual and the detriment of the other. Consideration must be something that has value before the law, and each party must provide consideration to the other for a contract to be enforceable. However, consideration is not motive (i.e. the reason why you enter into an agreement), because that has no value before the law.
What consideration is needed in an employment contract?
In the employment context, consideration is rarely at issue when the initial offer is given to an employee. The job promised to the employee, including the salary and related benefits, is adequate consideration for the employee, whereas the promise to do the work is sufficient consideration for the employer.
However, disputes about consideration occur when an employer tries to change the terms of an initial contract after an employee has started working, or when an employer provides an employee with an employment contract after they have begun working. A significantly changed term or a new contract requires consideration for that change to be enforceable.
The courts have found that the following changes are adequate consideration for an employee:
- A stock option benefit given to an employee in a new employment contract that is at cost to a company, in exchange for a promise from the employee to comply with specific terms (see Nortel Networks Corp v Jervis, 2002);
- Clarifying an unclear term in a contract because it had the mutual benefit of creating certainty between the parties (see Richcraft Homes Ltd v Urbandale Corp, 2016); and,
- An offer of employment given by a company taking over another company (see Krishnamoorthy v Olympus Canada Inc., 2017).
On the other hand, the following changes are inadequate consideration for an employee:
- A promise to perform an existing contract (see Holland v. Hostopia Inc., 2015);
- A new employment agreement that only changes an employee’s tax benefits (see Braiden v La-Z-Boy Canada Ltd., 2008); and,
- An employment agreement that an employee is forced to sign under the threat of termination, which does not provide any additional security beyond what was already bargained for in the offer letter (see Hobbs v TDI Canada Ltd., 2004).
What happens if there is no consideration?
If there is no consideration, the contract is unenforceable. This means that the contract has no force or effect, and the employee does not have to abide by the new terms of the contract.
The case of Kohler Canada Co v Porter is a perfect example. The employee began working without an employment agreement. After 13 years of working for the company, he was given an employment agreement and asked to sign it. The agreement included a non-competition clause that stated how the employee could not work anywhere in North America for a competitor for one year post-termination. The employer tried to argue that adequate consideration was provided because the employee was guaranteed employment at the company and guaranteed a salary after signing the agreement.
The Ontario Superior Court of Justice held that there was no consideration in this case. The employment agreement essentially documented the employee’s prior working relationship with the company, but included a non-competition clause that was detrimental to the employee. The court held that the employer needed to give something of value to the employee in exchange for the non-competition clause, otherwise there was inadequate consideration. Therefore, the employment agreement in question was unenforceable for lack of consideration.
What this means for employees is that no changes should be made to your employment contract without adequate consideration. Likewise, employers should be mindful that when they need to change employment terms for one of their employees, if there is no consideration, those terms will not be enforceable.
If you have further questions about consideration and employment contracts, please contact our Employment Law Group for assistance.