Changes to employment contract after hiring someone can have negative consequences. The following list will help startups avoid making common mistakes in employment contracts. One of the greatest assets any startup has is its employees. Avoid getting into legal suits by employees or repercussions with Revenue Canada by keeping the following tips in mind.
Changes to Employment Contract
Many startups may make changes to employment contract with an employee that is working for them or they have the employee sign the contract after they have already started working. In this situation, an employee already has a signed agreement.
Another scenario is having a potential employee sign an offer letter and then present them with a long form employment agreement after they are already working. Many startups may have employees they wish to keep but later decide that the contract terms need to be changed to less favourable terms.
Making Changes to Employment Contract After Hiring
The question for a startup is how to change the terms of an employment contract with less favourable terms without facing a lawsuit for constructive dismissal. Constructive dismissal arises when an employee is “construed” to have been dismissed due to changes in the original employment arrangement by an employer. This could be a change in compensation or a change in reporting relationships or responsibilities. In these situations, an employee may be able to resign and claim damages as if they had been dismissed without cause.
The recent decision of Holland v. Hostopia.com Inv., 2015 ONCA 762 from the Court of Appeal reinforces that employers cannot change employment contracts after an employee starts working. During the course of their employment, the company may want to make changes such as:
- reducing the number of hours they work
- moving or relocating the employee
- modifying their job duties and responsibilities
- changing their salary
- a significant change in roles or title of the employee
- changing who the employee reports to
The Ontario Court of Appeal held in Wronko v. Western Inventory Service Ltd. (2008) ONCA, 327 that an employee has three option available when an employer makes a unilateral fundamental change to an employment contract:
- Employee accepts the change (expressly or implicitly) and the employee continues to be employed under the altered terms.
- Employee rejects the change and sues for damages on the basis of constructive dismissal. (In Farber v. Royal Trustco  1 SCR 46, an employee refused to accept a demotion and successfully claimed constructive dismissal).
- Employee rejects the change, the employer can: (i) terminate the employee with proper notice; or (ii) permit the employee to continue to be employed but it would have to be on the same terms of the original contract.
How to Make Changes to Employment Contract
If an employer wishes to make a fundamental change to an employment contract, they cannot do so unilaterally. In other words, they will need the permission of the employee in writing.
The original contract can be amended in writing. In order for this change to be effective, there has to be fresh and new “consideration” (a legal term that requires an exchange of value whether financial or a perk in order to create a binding contract such as a raise, promotion, new stock option agreement, bonus or signing bonus).
It is important for an employer to provide the employee notice of employment contract changes and ask them to sign back to those changes they agree to with fresh consideration. The employer cannot tell the employee that they will be terminated if they don’t sign.
However, an employer can still terminate the employee upon proper legal notice. Most courts will not consider continued employment as “consideration”. Otherwise, an employee may sue for damages on the basis of constructive dismissal if an employer makes a change to their contract without the consent of the employee.
What to do If Employee Does Not Accept Changes to Employment Contract?
If an employee does not accept the company’s proposed changes to the employment contract, the company will be required to either keep the employee on the existing terms of the contract or they may terminate the employee by by providing notice or pay in lieu of notice in accordance with the Employment Standards Act (“ESA”) or common law, as applicable.
If an employment agreement does not say anything about the notice provisions, then the common law notice provisions will apply. Technically, after termination, the employer can make a new offer to the employee on the new terms. The provisions under the ESA are less favourable than the notice provisions under common law.
In summary, it is important to have a well-drafted employment agreement signed by an employee before they start working. Employers should have broad provisions which allow work duties to be amended to make changes to employment contracts.
Any existing employees should receive consideration for signing a new contract during employment. It may be appropriate to have fixed terms contracts for one year periods to allow for new negotiations and terms each year it is negotiated if you wish to make changes to employment contracts. You may be interested in our article for Small Business BC Are you Really an Independent Contractor, or Are you an Employee?
by Vandana Taxali (Entcounsel see www.entcounsel.com).