If you have a job, then, whether you know it or not, you have an employment contract! Let’s call it an employment agreement for ease. There are three different styles of employment agreements: what I will call a verbal agreement, a formal employment agreement, and a written letter agreement (these terms are not legal terms of art). They are all valid, so long as they clearly identify the key terms: the parties to the agreement, when it starts, what the job is, and what the compensation is. This article will briefly describe the three main styles of employment agreements, describe some of the fundamental terms which the law provides are part of all employment agreements, and then comment on the enforceability of some of the more common, and controversial, clauses in written employment agreements: the term of the agreement, termination clauses, and restrictive covenants.
Types of Employment Agreements
The simplest kind of employment agreement is a verbal agreement – there is generally no requirement an employment agreement be in writing (except, possibly, fixed term agreements longer than a year). A verbal agreement can be as simple as a conversation where your employer asks, “Will you work for me as a clerk for a salary of $48,000 per year, starting next Monday?” and you reply, “Yes, I will.” You may verbally negotiate further details like vacation allotment, hours of work, place of work etc. These verbal agreements are perfectly valid and binding; any unspecified terms will be governed either by relevant Employment Standards legislation or by common law decisions by prior judges on similar matters.
The most complex kind of employment agreement is a formal written contract with headings, a preamble, and a number of specified terms. These contracts are often signed by both sides, and contain core terms like job duties, compensation, vacation allotment, hours of work, and place of work; they may also include terms about termination pay, work place policies, confidentiality provisions, non-disclosure agreements, non-competition clauses, etc. You should always have a lawyer review a formal written employment contract to identify where your common law rights may be affected by the contractual language.
The third, and very common, kind of employment agreement is a written letter agreement. Somewhere between an oral agreement and a formal written contract, a letter agreement is a letter from the employer to you which sets out certain fundamental terms of the agreement. Letter agreements are typically on company letterhead; however, an email exchange would be considered a letter agreement. The employer may expect you to sign it to acknowledge agreement; however, if you don’t sign it but show up for work, you may be deemed to have accepted it. At a minimum, the letter agreement will detail the job title, job duties, place of work, and your compensation (wages, benefits, vacation entitlement, etc.). Letter agreements may also include some of the matters covered in formal employment contracts, especially termination provisions, and it will probably incorporate the business’s policies into the agreement. Like a formal written contract, you should always have a lawyer review any letter agreement before accepting it.
Fundamental terms of employment agreements
All employment contracts, whether verbal or written, will include certain fundamental terms. Employees have a duty to work, and a duty of good faith to their employer. Judges have decided all employers have a duty to provide work, a duty of fairness to the employees, a duty to maintain a safe workplace, and, most importantly, a duty to pay. In most provinces, employers have statutory obligations (for most but not all industries) including minimum wages, vacation pay, overtime, provision of maternity or parental leave, and human rights obligations. In B.C., self-regulated professionals, such as lawyers, doctors, accountants, and engineers, are not covered by the Employment Standards Act.
The employees’ duty to work and their duty of good faith to the employer require employees to work in furtherance of the employer’s interests, to follow lawful work orders, to behave, and to be honest and faithful to their employer. Dishonesty can be just cause for immediate dismissal!
Term of hire
Most employees who are hired permanently are hired on what’s called an “indefinite hire” basis; however, employers and employees can agree to a specified term of employment, i.e. for three years. That is permissible. Students’ summer jobs are often fixed term contracts as they are specified as for the summer. Any fixed term contract for a year or longer should be in writing. Parties to fixed term agreements can agree to a variety of terms, including scheduled raises, scheduled performance or salary reviews, and notice of early termination provisions. The agreement should specify what happens at the conclusion of the fixed term: does employment continue on an indefinite basis, or does it end? Any uncertainty is likely to be resolved in favor of the employee. I recommend employers seek legal advice to ensure the agreement plainly and clearly reflects their intentions.
Termination clauses
Many employment contracts, whether indefinite hires or fixed term contracts, will include termination clauses. Termination provisions govern how much notice each party must give to terminate their employment. Many written employment contracts will require the employee to give more than the stereotypical traditional two weeks’ notice (although some industries may have different traditional standards for notice of quitting). Most written employment contracts will also provide terms about how much notice an employer must give to terminate an employee without just cause. So long as notice of termination provisions are more than the Employment Standard Act minimums (see our article on Assessing Severance Pay), then they should be binding even in a fixed term contract. However, if there are no notice of termination provisions in a fixed term contract, then the employer could be liable to pay out your salary for the remaining term if they terminate the contract without just cause, and you could be liable for damages suffered by the employer if you quit without just cause.
Regardless of whether the contract is for an indefinite hire or a fixed term, the courts will carefully scrutinize termination clauses to ensure they don’t breach the Employment Standards Act. The law is fairly complicated on this point and varies from province to province. In British Columbia, recent case law has upheld an employment contract which provided notice of termination was as set out in the relevant employment standards legislation; however, a variety of Ontario cases have been setting aside notice of termination clauses which purported to mirror employment standards act minimums into an employment contract. As an example, termination clauses which have a broader definition of just cause than the Employment Standards Act have been held invalid.
Restrictive Covenants and NDAs
Sometimes employers will include restrictive covenants in your written employment agreement which purport to restrict your ability to work and/or compete with your former employer after termination of your employment. They are not always enforceable, though: they need to be reasonable in terms of the type of work restricted, the geographic scope, and the length of time covered.
There are different kinds of restrictive covenants:
1. A non compete clause prohibits former employees for competing directly with their former employer, such as taking clients away from the former employer.
2. A non solicitation clause prohibits former employees from soliciting the clients/customers of their former employer.
3. Restrictive covenants may be broader and may purport to prohibit former employees for working within the same or similar industry, and often for prolonged periods of time.
Non compete clauses and non solicitation clauses are more likely to be enforced than a general restrictive
covenant. In a true employment relationship, a restrictive covenant is presumptively unenforceable as a restraint of trade; however, that presumption can be challenged by the employer. In order to be enforceable, the employer must show the restrictive covenant is reasonable between the parties and with respect to the public interest, in the light of the circumstances existing at the time the contract is made, which includes the parties’ expectations of what could possibly happen in the future; all in light of in terms of the type of work restricted, the geographic scope, and the length of time covered.
For instance, a restrictive covenant which prevents someone from working in an entire industry (say the legal industry) anywhere in Canada is much less likely to be enforced than a restrictive covenant that prevents someone from working in a particular practice area (say motor vehicle accident litigation) in a particular neighbourhood (say North Burnaby). Further, a restrictive covenant which would last for six months is more likely to be enforced than a restrictive covenant which would last for five years.
It’s important to note the courts have drawn a distinction between restrictive covenants in true employment agreements and restrictive covenants arising from the purchase and sale of a business. While restrictive covenants in employment agreements are difficult to enforce, restrictive covenants in purchase and sale
agreements are more often enforced. In the case of a restrictive covenant in a contract for purchase and sale, it is up to the vendor affected by the restrictive covenant to show it's unreasonable. If an employment agreement is part of the purchase and sale of a business (for instance, if the former owner of a business bought out by a larger business also joins the purchasing larger business), then the restrictive covenants may be considered part of the commercial agreement, and the presumption of unenforceability does not apply.
Similar to restrictive covenants, employment contracts may also include non disclosure clauses (colloquially NDAs). Consistent with an employee’s duty of good faith to their employer, written contracts
often include terms surrounding confidentiality of information and non-disclosure of trade secrets. These non disclosure clauses are enforceable, and many employers take them very seriously. Even without these clauses, employees may be personally liable for disclosing trade secrets, especially in the currency of their employment. Most non-disclosure clauses will survive the employment contract, which means they last beyond the termination of employment by either party.
As you can see, there are many different types, or styles, of employment agreements. The former structured the employment agreement, the more pitfalls there may be in the agreement. If you have been presented either a letter agreement or formal employment contract, you should seek legal advice now with respect to the validity of the terms and how they will affect you now, during your employment, and when you leave that employment. An ounce of prevention is worth a pound of cure!
