When Can An Employment Contract Be Set Aside?

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Many employees foolishly decide to save the hour or so in legal fees to have their contracts reviewed, only to then forfeit vastly greater amounts. Employers are no better. Close to half the contracts I encounter are replete with glaring legal errors. Cobbling together disparate precedents without regard to either symmetry or changes in the law is a recipe, in any legal area, for financial purgatory.

So how can employees have contracts set aside?

Contracts provided after employment is agreed to Once the parties agree to the terms of employment, it is too late to ask an employee to sign a contract with any new or different terms.

Too often, employees arrive on their first day of work only to be required to sign an employment contract with terms they have never seen before, usually non-compete or termination provisions.

You can sign them with abandon because they are entirely unenforceable, as was determined by the Ontario Court of Appeal as long ago as 2004 in the case of Allan Hobbs vs. TDI Canada, where I acted for Hobbs.

Employers are not without recourse. They can add a new term, at any time during employment. But to do so, they must provide the employee something new (called "consideration") in return for it.

Changes to the "essential substrata of employment" If an employee with an employment contract governing severance is hired as, say, marketing manager with a salary of $45,000 and no bonus and is terminated 10 years later after being promoted to vice-president of engineering, with a salary of $300,000 plus a $150,000 bonus, it is almost certain the original severance provision will not be enforced.

The court will conclude that the parties never intended that initial contract to govern the final position and remuneration.

Employers should set a term that the severance is intended to govern, regardless of any subsequent changes to position, remuneration or any other term of employment.

Alternatively, and even more prophylactically, albeit more difficult to accomplish, the employer can have a new contract signed whenever the employee undertakes a new position or change in remuneration.

The employee never signed the contract It is surprising how often an employer fails to produce a copy of the employment contract agreed to by the employee. Unless the employee finds and produces it or acknowledges they saw and agreed to it, the contract is unenforceable. The exception to this is if the employer, in offering the job, sends a copy of the contract and advises the employee, in writing, that commencing the position will constitute the acceptance of the terms of the contract. In that case, the employee's signature is unnecessary.

A contract that is below the provisions of the Employment Standards Act The Supreme Court of Canada in the decision of Marek Machtinger and Gilles Lefebvre vs. HOJ Industries, where I also acted for the successful employees determined such a contract to be unenforceable.

The law has evolved to the point, even if the termination clause in the employment contract meets the minimum provisions of the ESA at the time of termination, the clause can be struck down if it prospectively or retroactively fails(ed) to, at any time during the employee's potential employment.

In other words, if an employee is fired six months after starting and the contractual amount matches the ESA then but, if she had worked for 20 years, the ESA amount would have exceeded that provided for in the contract, the employer will be unable to rely on the contract.

Similarly, if the termination clause provides for payment for the employment standards minimum period but makes no allowance for the benefits also required for that period by the ESA, the contract will be ruled unenforceable.

Popularly considered defences that are generally illusory Contrary to popular view, except in rare exceptions in the caselaw, the following situations seldom permit a court to set aside a contract: No independent legal advice; requiring an employee to sign without permitting any counter-offer; pressure during the negotiations.

Note: This a reprint of an article by Howard Levitt of Levitt & Grosman LLP.