Why Have An Employment Contract?

Sources of Employment Law

Employment law is governed by three main sources of law: statute, the common law (or Civil Code in Quebec) and individual contracts of employment.

Employment Standards statutes – provincial or federal – provide the basic framework and establish the floor of rights and obligations in the employment relationship. These rights are subject to change through statutory amendment.

The common law, through judicial decisions of specific cases and issues, clarifies and confirms the rights of the individual parties before the court, and also establishes concepts and principles applicable to others beyond the individuals involved in a specific case. Indeed, at common law, a series of implied terms have been established that can be read into any employment agreement, whether oral or written; the two most applicable to the issue at hand being the provision of reasonable notice on termination or pay in lieu thereof and the duty of an employer to act in good faith towards an employee in the manner of his/her dismissal.

Employment agreements between parties to an employment relationship create another source of law that determines the rights and obligations of employee and employer – one specific to the parties – which, if properly created and maintained, including in relation to the minimum employment standards in the jurisdiction - can provide for certainty of terms between the parties.

Certainty of Terms

Employers often consider using employment agreements in order to create certainty of terms between the parties with respect to reasonable expectations surrounding notice or pay in lieu of notice on termination. A carefully crafted and properly constituted employment agreement that complies today and prospectively with employment standards legislation with respect to an employer’s obligations to an employee upon termination can and will be enforced by a court. An employer may decide that an appropriate termination clause corresponds to the applicable minimum standard in the applicable employment standards statute, or it may decide or negotiate with an employee some greater period of notice or pay in lieu of notice based upon a formula or calculation. Ultimately, employers often find that the limitation of liability can be beneficial – but employers are forewarned that any significant changes to the employee’s position (such as a promotion) must give rise to due consideration of the impact of such change on the enforceability of this type of clause in the employment contract.

Protection of Employer’s Interests

In addition, employment contracts can include a host of other provisions beneficial to employers towards the creation of set expectations. Such provisions include clauses detailing expectations for the position and the employee’s conduct in the role, the expectation that an employee will not be employed for another employer and will devote his/her full time and attention to the business of the employer, applicable notice by an employee to the employer upon the employee’s resignation, clauses confirming an employee’s duty of confidentiality (both during and after the cessation of the employee’s employment), provisions confirming ownership of intellectual property and inventions, etc.

Protection of Business or Proprietary Interests

Employers often seek to protect their business and proprietary interests through means more forceful than provisions relating to confidentiality and ownership of property. Given that non-competition and non-solicitation issues are seen fundamentally as a restraint of trade, employers wishing to include such restrictions in their employment contracts must do so in writing. Moreover, employers wishing to include such provisions must ensure that they are tailored specifically to the parties, and that the interests the employer seeks to protect are not so broad as to result in an impermissible restraint of trade. Regard must be had in each case to articulate a clear, focused and balanced clause with certain terms that are understood. Even then, it remains open for a court to find that a non-competition provision is over-broad and a non-solicitation clause sufficient in the circumstances.

Whole Contract

It goes without saying that a court considering the terms of a contract between the parties will look at all of the agreement’s provisions and the actual business reality. For example, in evaluating the enforceability of a restrictive covenant, the court will often have regard to the employment contract’s termination provision, if one is included, to evaluate the overall fairness and enforceability of the non-competition provision. Flowing from such a review, a court may decide that a restrictive covenant is too broad and is a restraint of trade. A court may similarly consider whether it is appropriate to apply a termination clause where the nature of the employee’s work or the level of his/her position and remuneration has changed significantly from the date of the signing of the original document.

In this regard, while employment agreements can create certainty, employers must be vigilant in ensuring their agreements continue to reflect the commercial and legal reality of the employment relationship.