Publication
TITRE
Employment Contracts Need to Be Given Due Consideration
DATE
3 mai 2005
Any valid contract, including an employment contract, requires the parties to give each other something in exchange for entering into the agreement. In legal terms, the parties must give each other "consideration" in order for their contract to be enforceable. The Ontario Court of Appeal recently affirmed this principle as it applies to employment contracts in the case of Hobbs v. TDI Canada Ltd. ([2004] O.J. No. 4876). This case sends a clear message: If an employer wants particular terms of an employment contract to be enforceable, the terms must be clear, and the contract must be signed by the employee before his or her first day on the job.
THE FACTS
Allan Hobbs, an experienced advertising salesperson, left another job to join TDI Canada Ltd. As a salesperson, Hobbs' earnings were primarily based on his commissions. In their pre-contract discussions, Hobbs and TDI verbally agreed on commission rates and had a common understanding of how commissions were calculated and paid in the industry. Before resigning from his old job, Hobbs insisted on receiving a written offer of employment from TDI. The offer letter Hobbs was provided with did not specify his commission rates, but read: "Details on the rates, calculation and payment of commissions shall be provided to you in a separate document." Hobbs resigned from his old job the same day he signed TDI's offer letter.
Approximately a week after Hobbs started working for TDI, he was presented with a document entitled "Solicitor's Agreement" that he and the other sales representatives were told was a non-negotiable document they had to sign in order to be paid. In contrast to both the offer letter that Hobbs had signed and prevailing industry practice, the Solicitor's Agreement significantly restricted Hobbs' entitlement to commission income and gave TDI absolute discretion to change commission rates. While it was normal in the industry to receive commission payments net of draws every quarter, among other things, the Solicitor's Agreement provided that Hobbs would not receive any commissions until he had exceeded his annual draw. It also limited his right to receive commissions after his employment was terminated. Despite Hobbs' concerns about the Solicitor's Agreement, he signed it.
Hobbs had interpreted the Solicitor's Agreement to mean that he would be paid his accrued commissions every quarter. After his first quarter with TDI, Hobbs asked when he would receive his commission cheque and was told that he would not be paid until he had reached his full annual draw and his clients had paid TDI in full. Hobbs continued to work, hoping to exceed his annual draw and be paid. Midway through his second quarter with TDI, Hobbs had exceeded his annual draw and asked again when he would receive his commissions. He was told that, pursuant to the terms of the Solicitor's Agreement, he would not be paid until TDI had collected on all of his billings. Hobbs feared that he might not be paid at all and gave TDI notice that he would be resigning at the end of the month. Hobbs then sued TDI for commissions owing, constructive dismissal and misrepresentation.
THE DECISION
The primary issue was whether the terms of the Solicitor's Agreement were enforceable. The trial court held that they were, finding that a single contract comprised of two parts-the offer letter and the Solicitor's Agreement-had been created. Since TDI had acted in accordance with the Solicitor's Agreement, Hobbs' claims were dismissed.
The Ontario Court of Appeal, however, overturned the trial court's decision and awarded Hobbs the value of his unpaid commissions, calculated under the terms of his offer letter from TDI and its related assumptions. The Court of Appeal held that the trial judge had erred for three reasons in finding the letter of agreement and Solicitor's Agreement to be a single contract of employment: (1) the offer letter did not indicate that it was only part of a more detailed contract of employment; it did not outline the terms set out in the Solicitor's Agreement, nor did it inform Hobbs that he would be required to sign any additional documents; (2) the Solicitor's Agreement was inconsistent with the provisions concerning commissions that Hobbs and TDI had agreed upon verbally; and (3) the Solicitor's Agreement was given to Hobbs after he had been hired and started working, and therefore a contract had already been entered into.
The Court of Appeal concluded that the Solicitor's Agreement was an amendment to the employment contract entered into a week earlier. However, since TDI did not give additional consideration to Hobbs in exchange for Hobbs signing the Solicitor's Agreement, its terms were not enforceable. The Court of Appeal affirmed its earlier decision in Francis v. Canadian Imperial Bank of Commerce ((1994), 21 O.R. (3d) 75 (C.A.)), stating that "the law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and then rely on the continued employment relationship as the consideration for the new terms."[i] While in certain cases an employer may give an employee adequate consideration for changes to an employment contract by refraining from terminating the employee or by giving the employee increased job security, this was not one of those cases. The Court of Appeal's judgment stressed that consideration to support an amended contract is particularly important in the employment context "where, generally, there is inequality of bargaining power between employees and employers."[ii]
IMPLICATIONS FOR EMPLOYERS
The best way for an employer to ensure that all provisions of an employment contract will be enforceable is to make sure the terms of the employment contract are clear and to have the employee sign the employment contract before he or she starts work. When an employee signs part or all of an employment contract after commencing employment, there is a risk that the terms will not be enforceable due to a lack of consideration. Finally, employers who wish to change their employment contracts with their current employees should ensure that the employees receive adequate consideration for agreeing to the changes.
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.
For further information, please contact one of the following lawyers:
David J. Bannon (416) 216-3907
dbannon@ogilvyrenault.com
Richard J. Charney (416) 216-1867
rcharney@ogilvyrenault.com
Daphne Fedoruk (613) 780-1540
dfedoruk@ogilvyrenault.com
Anne K. Gallop (416) 216-4038
agallop@ogilvyrenault.com
Mary J. Gleason (613) 780-8635
mgleason@ogilvyrenault.com
Michael F. Horvat (416) 216-3999
mhorvat@ogilvyrenault.com
Charles E. Hurdon (613) 780-8653
churdon@ogilvyrenault.com
Kristen Lopes (416) 216-3925
klopes@ogilvyrenault.com
John Mastoras (416) 216-3905
jmastoras@ogilvyrenault.com
Michael G. McFadden (416) 216-3973
mmcfadden@ogilvyrenault.com
Dan G. Palayew (613) 780-8637
dpalayew@ogilvyrenault.com
Darren S. Power (613) 780-8663
dpower@ogilvyrenault.com
Caroline Ursulak (416) 216-4003
cursulak@ogilvyrenault.com
Kimberley Walters (416) 216-4274
kwalters@ogilvyrenault.com
John B. West (416) 216-3976
jwest@ogilvyrenault.com
Russel W. Zinn (613) 780-8672
rzinn@ogilvyrenault.com
[i]. Hobbs v. TDI Canada Ltd. [2004] O.J. No. 4876, at para. 32.
[ii]. Hobbs v. TDI Canada Ltd. [2004] O.J. No. 4876, at para. 42.
Personnes-ressources
David J. Bannon
Toronto
416.216.3907
dbannon@ogilvyrenault.com
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Richard J. Charney
Toronto
416.216.1867
rcharney@ogilvyrenault.com
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Daphne Fedoruk
Ottawa
613.780.1540
dfedoruk@ogilvyrenault.com
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Anne K. Gallop
Toronto
416.216.4038
agallop@ogilvyrenault.com
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Mary J. Gleason
Ottawa
613.780.8635
mgleason@ogilvyrenault.com
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Michael F. Horvat
Toronto
416.216.3999
mhorvat@ogilvyrenault.com
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Charles E. Hurdon
Ottawa
613.780.8653
churdon@ogilvyrenault.com
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John Mastoras
Toronto
416.216.3905
jmastoras@ogilvyrenault.com
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Michael G. McFadden
Toronto
416.216.3973
mmcfadden@ogilvyrenault.com
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Darren S. Power
Ottawa
613.780.8663
dpower@ogilvyrenault.com
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John B. West
Toronto
416.216.3976
jwest@ogilvyrenault.com
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