Employment Contracts Series: Why Do I Need One?

Whether it is written down or not, if you have employees, you have employment contracts.  Whether you have a written or an unwritten employment contract, the Employment Standards Act (2000) (Ontario) (the “ESA”) steps in to provide minimum employment standards, which govern the employment relationship.  All other aspects of the employment relationship can be defined by written contract, and if there is no written contract in place the relationship will be governed by terms that become implied over time and by the common law.

Having a written employment contract allows both you and your employees to have a clear understanding of the expectations that you have of each other and allows you, as the employer, to limit your liability in a number of important ways.

Most employers make offers of employment by way of an offer letter, which will detail the compensation that the employee will receive, as well as some of the basic expectations of employment (such as hours of work).  These offer letters are often the only written form of employment contract that exists between the employer and employee.  The problem with offer letters is that they are courtship documents: they reflect the employer’s intentions at the beginning of the employment relationship when they are trying to woo the potential employee into the workplace.  Many employers do not either contemplate the level of detail which should be addressed as well as how the relationship will end, or they don’t think that these details should be within a courtship document.  Much like a marriage contract, a fulsome and binding employment agreement may not be what the parties want to think of at the point that they consummate their relationship, but it will provide for a smoother relationship if both parties are clear on expectations from the start.

When to enter into employment agreements:

It is important to enter into written employment agreements with employees prior to their commencing employment.  To be binding, contracts need three things: offer, acceptance and consideration.  Consideration is the job itself and the compensation attached to it if the employee has not yet started working for the employer.  However, once an employee is working continued employment does not constitute consideration so some additional consideration needs to be provided for the contract to be binding.

Employment agreements should be updated whenever an employee changes positions.  If you do not have a written employment agreement with your employees, you can have those employees enter into an agreement, provided it is done at a time when that employee is being compensated for the new agreement, for example when a promotion or unusual salary increase is given to the employee or when a new benefit is introduced (such as stock option grants).

Factors which should be addressed in a written employment contract and which I explore in other blog posts, include compensation and benefits, incorporation of employment policies, intellectual property ownership (if relevant), confidentiality, non-solicitation and non-competition clauses and perhaps most importantly, provisions for terminating the employment agreement.