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Employment Contracts - Laying the Foundation for a Strong Working Relationship
An employment contract is an agreement between an employer and an employee outlining the terms and conditions of employment. The formation of an enforceable employment contract is essential to protect the rights of employers and obligations of employees. This blog post will delve into the common law requirements of an employment contract, which are: 1) offer, 2) acceptance, 3) certainty of terms, 4) consideration, and 5) legal capacity.
1. Offer
The first essential element of an employment contract is the offer. An offer is a proposal made by the employer to the employee, indicating the terms and conditions of the proposed employment relationship. The offer can be made in writing or made verbally. To be legally binding, the offer must be clear, definite, and comprehensive, including all the essential terms of employment (which is why employers should use written employment contracts).
2. Acceptance
Acceptance is the second element of a valid employment contract. For a contract to be binding, the employee must accept the employer's offer without any modifications. Acceptance can be expressed verbally, in writing, or through conduct (e.g., starting work under the offered terms). If the employee proposes changes to the offer, it is considered a counteroffer. The employer can then decide whether to accept the counteroffer, reject it (without any liability for not making a new offer or offering the same original offer again), or make a new offer.
3. Certainty of Terms
Certainty of terms is a crucial requirement of a valid employment contract. An agreement between two parties to enter into an agreement by which "some critical part of the contract matter is left to be determined is no contract at all" (source). For a contract to be enforceable, its terms must be sufficiently clear and definite so that both parties understand their rights and obligations. Ambiguity in the contract terms can lead to disputes, as the parties may have different interpretations of their obligations.
Hence, it is crucial to ensure that employers use written employment contracts that include all essential terms, such as, for example:
- Remuneration: Stating the employee's salary or wage and any additional benefits or bonuses.
- Duration of the contract: Indicating whether the employment is fixed or indefinite.
- Termination provisions: Setting out the conditions under which either party can terminate the contract.
- Read more key terms to include in an employment contract here.
4. Consideration
In contract law, consideration refers to the exchange of something of value between the parties to a contract. In an employment context, consideration usually takes the form of the employee providing their labour and skills in exchange for remuneration from the employer. For a contract to be legally binding, the consideration must be sufficient and not nominal (i.e., not a token amount or purely symbolic). Moreover, the consideration must be mutual, meaning both parties must provide something of value.
Consideration is a more significant issue than it seems. Many employers make the mistake of giving new employment contracts to an existing employee without any fresh consideration (i.e. a bonus or a raise), making the new contract proffered to the employee completely unenforceable. The rationale for this was noted in Hobbs v. TDI Canada Ltd (2004 CanLII 44783 (ON CA)): "The requirement of consideration to support an amended agreement is especially important in the employment context where, generally, there is inequality in bargaining power between employees and employers. Some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment, but once they have been hired and are dependent on the remuneration of the new job, they become more vulnerable.
5. Legal Capacity
Lastly, the parties to an employment contract must have the legal capacity to agree. Legal capacity refers to the ability of a person to understand and appreciate the consequences of their actions, including entering into a contract.
Some individuals may lack legal capacity due to factors such as mental incapacity or if they were lied to / misrepresented.
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