By: Andrew Mae
Partner, HGR Graham Partners LLP
Can an employer change the terms of employees’ existing contracts of employment?
The answer is “yes” but there are hurdles which, if not addressed correctly, may result in either a constructive dismissal or the changes not being effective.
There are many reasons why an employer may wish to change the terms of its employees’ existing contracts. The common reasons include: (i) trying to limit the employees’ entitlements to severance/notice under the common law; (ii) wishing to rationalize all of the employees’ contracts – to provide uniformity among its workforce; (iii) to clarify existing terms or to seek to impose new provisions.
To change the terms of existing employees’ contracts and to try to ensure that the changes are valid and enforceable, the following basic principles apply:
a. The employee must consent to the amendments;
b. The amendments cannot be unilaterally imposed by the employer;
c. As part of the employee providing valid consent, the changes to the contract must be supported by “consideration” (which I will discuss below); and
d. The contract must meet or exceed the provisions of the Employment Standards Act (“ESA”).
Usually, changes to employment contracts that solely benefit the employee by providing the employee with more entitlements, rarely cause any issues. The challenge comes when the amendments to the contract modify, remove or limit the employee’s existing entitlements or impose new obligations on the employee, in other words when the employee is either going to get less and/or be expected to do more.
“Consideration” is providing something, or a promise to provide something, of value for entering into the contract. Then an employment contract is signed upon the employee accepting employment, the employer’s consideration is the job offer and the promise of pay. The promise of services (i.e. work) on the part of the employee is the employee’s consideration.
After an employee has accepted an offer of employment (regardless of whether s/he has started work or not), for a change to the contract terms to be valid, the employer must provide fresh consideration (i.e. something of value). Permitting the employee to continue to be employed is not valid consideration.
Fresh consideration is not a mere small pay increase or a scheduled pay increase. A recent promotion, or past pay raise, in fact anything that has already been provided by the employer, is also not adequate consideration.
Examples of valid consideration include: allowing the employee to participate in a new bonus/commission plan, additional weeks of paid vacation, a promotion, a pay raise (which must be more than a minor increase in pay), a new benefit, or a “signing bonus”. The essential aspect that must be present is that the employee is receiving something of real value that s/he is not already entitled to receive.
Constructive Dismissal
An employer can make any changes to an employee’s position that are allowed by the existing contract as part of the employer’s managerial authority. However, that is not “catch-all” in respect of all changes. The safer assumption is that changes imposed by the employer may constitute a constructive dismissal that leads to the employee becoming entitled to be paid notice and severance (and possibly other damages) as if s/he had been terminated on a without cause basis.
Where an employer decides unilaterally to make substantial changes to the essential terms of an employee’s contract of employment and the employee who does not agree to the changes leaves his or her job as a result, the employee has not resigned, but instead has been constructively dismissed. In fact, in certain circumstance, an employee can sue for damages for constructive dismissal without quitting his/her employment.
To reach the conclusion that an employee has been constructively dismissed, the court determines whether the unilateral changes imposed by the employer substantially altered the essential terms of the employee’s contract of employment.
The test to determine whether an employee has been constructively dismissed involves considering whether, at the time the new terms were established, a reasonable person in the same position as the employee would feel that a unilateral change had been imposed by the employer resulting in a substantial alteration to the essential terms of the employment contract. It is not necessary for the employer to have intended to force the employee to leave his or her employment or to have been acting in bad faith when making substantial changes to the essential terms of the contract.
Each case is decided on its own merits and facts by the court.
Process
If an employer wishes to amend the terms of an existing employee’s contract and both (i) minimize the risk of the employee successfully claiming that s/he has been constructively dismissed or (ii) enhance the employer’s ability to enforce (i.e. rely on) the new contract terms, there are principally three possible options, which I summarize below:
Option #1 [which I called the “sensible option”]
is to try to engage the employee and obtain their consent to the changes: Under this option:
a. The employer would present the offer to the employee;
b. The offer will contain additional compensation/bonus/benefits i.e. provide a valuable consideration;
c. The offer might include provisions that either:
i. Simply limit the entitlement on termination to their rights under the ESA; OR
ii. Limit the employee’s rights on termination to ESA and establishing a fixed payment of an amount for his/her common law rights.
d. The employer would:
i. Give the employee the ability to review the offer and the absolute choice to accept the new terms;
ii. Give the employee time to seek legal advice (and recommend that s/he do so);
iii. Even offer to provide the employee with a payment towards his/her lawyer’s costs;
e. If the employee does not accept the new terms, make it clear that his/her current employment continues without change and then do not act towards the employee in any manner that could be construed as some sort of reprisal or demonstration of hard feelings for the employee not agreeing to the proposal.
Option # 2 [which I call the “hostile option”]:
a. The employer would provide the employee with working notice (i.e. notice of termination) accompanied by a new job offer commencing after the termination date.
b. As part of the new offer, the employer would:
i. Give the employee time to review and accept the offer;
ii. Give the employee time to seek legal advice (and recommend that s/he does so);
iii. Consider offering something for the employee to enable him/her to obtain a lawyer’s opinion before accepting the offer i.e. provide the employee with payment towards his/her lawyer’s fees.
Option # 3 would be to make no changes at all.
However, under this option the employees’ entitlements under the common law for severance/notice will continue to increase.
There are business considerations concerning each option which must be carefully reviewed and determined on a case by case basis. If you want to consider changing the terms of existing employment contracts, speak with a lawyer so that you can make an informed decision and risk assessment before proceeding.
Back to Part 1: The Benefits of Written Employment Contracts (A Horror Story for Employers That Can be Avoided)Andrew Mae is the head of the Corporate & Civil Litigation Group at HGR Graham Partners. Andrew has a focus on Employment Law, human rights claims, land-related disputes, commercial contract and professional negligence claims, corporate, commercial and business disputes including shareholders’ disputes.
*The content of this article is intended for general information purposes only and does not constitute legal advice or an opinion of any kind. For information or legal advice on your individual circumstances, please contact Andrew Mae.