Canada: Indecent Proposal? Whether And How To Ask Existing Employees To Sign New Employment Contracts

Asking existing employees to sign new employment contracts can be a sensitive topic. Employees will undoubtedly wonder why they are being asked to do so. Many will quite rightly assume that the employer's main motive for having new contracts be signed is to protect the employer – not the employee. Some will sign without issue, while others will refuse to do so. Others may sign reluctantly, and perhaps feel some ongoing resentment towards the employer for being asked to do so. Employers should, therefore, proceed with caution when asking existing employees to sign new employment contracts.

Reasons for Having Existing Employees Sign New Employment Contracts

There are many valid and pressing situations where employers may want or need employees to sign new employment contracts. These include:

  • Where there is nothing in writing with a given employee. The employee was hired with a hand-shake. The terms of employment were agreed upon verbally. As is often the case with informal hand-shake deals, important employer provisions – such as termination obligations or restrictive covenants – were never discussed. Even if discussed and agreed upon, there is no clear written record to rely upon if the situation were to later become litigious.
  • Where the employee signed an employment contract, but either it is missing key provisions (i.e. those designed to provide protections to employers or flexibility in how employers can operate) or is poorly drafted. Poor drafting can expose the employer to unintended liabilities for a number of reasons, including the fact that anything unclear or ambiguous will generally be interpreted in favour of the party who is not the drafter of the document (i.e. the employee).
  • Where the employee signed an employment contract, but for a position no longer held by the employee. The employee was transferred or promoted within the organization – perhaps several times – since signing the initial contract. There is unfortunately no or insufficient language in the initial contract that has the effect of having provisions in that contract automatically continue to apply to future positions held by the employee.
  • Where the employee signed an employment contract, but it was signed in circumstances where the enforceability of the employer-friendly provisions may be called into question. This would include situations where: (a) an employee accepted a verbal offer of employment, and perhaps even gave notice of resignation to her former employer, before receiving the employment contract; (b) an employee was provided insufficient time to consider and consult legal counsel about the employment contract before being required to sign it back; (c) an employee was provided the employment contract to sign after already commencing employment (i.e. on or shortly after the first day of employment); (d) the employee was provided the employment contract in advance, but did not sign it back until sometime after commencing employment; and/or (e) the employee was told not to worry about the employment contract as "it's just a technicality required by our lawyers" or "we never rely upon those provisions in the contract".
  • Where the employee signed an otherwise enforceable employment contract, but certain provisions are now out-dated. It may refer to old laws no longer in place or, as often happens, it contains provisions that, while well drafted and legally enforceable at the time that the initial contract was prepared, may no longer be legally enforceable.1
  • Where the employer wishes to now make changes to terms of the employment relationship and either wants or needs to get employee agreement to make those changes. The employer doesn't want to deal with a situation down the road where the employee claims either to not have agreed to, or understood, the revised terms of employment.
  • The employer has entered into an agreement with a third party that requires updated employment contracts to be entered into by all or certain employees. For example, the employer wishes to sell its business, but the purchaser is requiring that new employment contracts be entered into by the employer and certain key employees as a condition of the closing of that transaction.

Tips When Asking Existing Employees to Sign New Employment Contracts

If asking existing employees to sign new employment contracts, consider the following:

  • Determinate a "spin" on why existing employees are being asked to sign new employment contracts. While you don't want to be untruthful, few employees may sign if you disclose all of the reasons why new employment contracts are important for the employer. Spinning it as being part of an overall review by the employer of its employment contracts in order to ensure that updated and consistent employment practices are in place for employees may be an easier sell.
  • Consider the best time to have new employment contracts be signed. For example, new employment contracts should ideally be signed every time that an employee is offered a promotion or voluntary position change within an organization. Another ripe opportunity for doing so is when the employer is already intending – unbeknownst to the workforce – to roll out some significant positive employment change for the affected employees (e.g. new improved benefit program; wage increase above historical norm; flexible working arrangements; additional paid time off work; etc.). If the employee wants the new position or to receive the benefit of the positive employment change, then the employee will need to sign the new employment contract.
  • Ensure that sufficient "consideration" is provided to the employee in exchange for signing the new employment contract,2 failing which the employer-friendly provisions in that new contract will not be binding on the employee. Consideration must be "something extra" to which the employee is not otherwise entitled. What is considered to be sufficient consideration will differ from situation to situation. It generally needs be of a reasonable value in light of what the employee is giving up by signing the new contract. For example, a $100 signing bonus would not, in my view, be sufficient consideration for having a 15-year employee sign a new contract that limits termination entitlements to the statutory minimums and contains a 12-month non-solicitation clause. In contrast, a $5,000 signing bonus or an additional 1% wage increase or 1 week of annual paid vacation may well be enough.
  • Consider what to do if the employee does not to sign the new employment contract. Are you prepared to have the employee continue without a new contract in place? If not, then when and under what terms will the employment relationship end? For example, the employee could be given written notice that the new contract must be signed by X date, failing which the employment relationship will be terminated on Y date. Refusing to sign a new contract will not be cause to terminate the employment relationship – but depending upon the amount of working notice provided and the employee's entitlements upon termination, all or a significant part of the employee's termination entitlements may be satisfied via the working notice period.
  • If not prepared to end the employment relationship if she refuses to sign the new contract, then do not tell the employee that she must sign the new contract in order to remain employed. Instead, provide the employee with the option to sign or not sign the new contract. However, make it clear to the employee that she will not receive the consideration (i.e. the "something extra") if she chooses not to sign the new contract. And, to state the obvious, if the employee doesn't sign, then don't give the consideration to her.
  • Of course, ensure that the new contract is well drafted based on the current laws, and is introduced in circumstances that will not jeopardize its enforceability down the road. Among other things, this means providing sufficient opportunity for the employee to consider the new contract and to obtain independent legal advice if so desired before signing it back. In fact, you may wish to consider paying for the employee to obtain such legal advice up to a specified amount (e.g. $500).

Footnotes

1 We have seen this happen over the past number of years with termination provisions in signed employment contracts. Certain termination language that courts have historically upheld as legally enforceable is no longer being enforced.

2 Courts have consistently held that continuing the existing terms of employment is not sufficient consideration for existing employees. However, an offer of new employment is considered to be sufficient consideration for new employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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