Employment Contracts: What You Need to Know

Employment contracts are the framework of the employment relationship and can have important implications that may last for years. Although some employment contracts may be intimidating, Ontario courts are increasingly employee-friendly and often strike down employment contracts that are overly harsh, unclear, or illegal.  

Employment contracts are increasingly more common. In 2020, the Ontario Court of Appeal case of Waksdasle v Swegon, 2020 ONCA 391, has reinforced the trend of protecting employees against contracts that are in breach of minimum employment standards. This decision is an important case for employees who may be entitled to significantly more severance pay as a result. 

Read more to find out :

  • What an employment contract is;
  • The important terms to look for in an employment contract;
  • What your rights are;
  • How the implications of your employment contract may have changed after the 2020 Ontario Court of Appeal decision; and
  • How to protect your rights.  

What are employment contracts?

Employment contracts are agreements to work.  They can take a variety of forms and are fluid in how the terms are set. The Employment Standards Act (“ESA”) is the legislation that sets out minimum employment rules in Ontario and is particularly important for workers in the province.

The terms of every employment agreement in Ontario are subject to the obligations of the ESA. Importantly, parties cannot contract out of the ESA. This means that the terms of an employment contract cannot be worse than what the ESA guarantees.  

The rights and obligations in an employment relationship are complex and determined by considering the following factors:

    • Any oral representations or agreements of the parties;
    • The conduct of the parties;
    • Any ancillary or additional written documents that complement the employment contract;
    • The common law and the Employment Standards Act;
    • The express employment contract terms; and 
    • Any implied employment terms in the employment contract (read more on implied terms).

What type of employment contract do I have?  

There are three main types of employment contracts: indefinite-term, fixed-term, and project-based. Each of these contracts is a way to clarify the obligations and requirements of the working relationship. Though each of these contracts creates a different kind of employment relationship, they are all still subject to the same requirements as listed above.

1. Indefinite-Term Contracts

Indefinite-term contracts are very common, particularly amongst workers with stable employment and traditional job security. In essence, they state that a worker will do a job for an employer, but do not include a specific end date of the termination.  

Indefinite-term contracts can be terminated without cause, but in that case, the employee is entitled to notice of termination. This notice of termination is often substituted for severance pay. Alternatively, these contracts can be terminated with cause, in which case the employee is not entitled to notice of termination or termination pay.   

2. Fixed-Term Contracts

Fixed-term contracts are work agreements that terminate naturally on a pre-determined date. An example of this is a contract that states that the worker will work for the employer for a period of one year. In this case, the contract can be terminated without cause if the express term specifying the end-date of the contract is valid and enforceable. In that case, the worker is not entitled to notice of termination or severance pay, as the termination date was agreed upon in advance. 

If the worker is terminated without cause prior to the date specified in the fixed-term contract, then the employee is entitled to damages in the amount of the remainder of the fixed term. So, if a worker signs a contract for one year of work and the employee is terminated after completing only five months of work, they are entitled to seven months of termination pay, as that is the remainder of the contract.  

In certain circumstances, fixed-term employees might be entitled to more than what their contract provides:

  • Series of fixed-term contracts. If an employee worked for an employer for many years through a series of fixed-term contracts, for example the employee has been signing yearly contracts for 12 years with the same employer, the court may find that the employee has 12 years seniority and is entitled to higher severance pay.
  •  Automatic renewals. If the fixed-term contract has an automatic renewal clause, the employee may be entitled to contractual damages for the duration of the renewal period.

3. Project-Based Contracts 

Project-based contracts begin and end “as needed.” In this case, the contract does not include any temporal restrictions but instead lasts as long as required to complete a certain project. Often the contract is labeled as a consulting or licensing agreement and is a common arrangement in the gig economy. For example, a worker may be hired to perform certain IT work or catering services for certain projects. These workers are often misclassified as independent contractors who are not covered by the ESA.  

Many workers are misclassified as independent contractors and are actually employees. In that case, those workers are entitled to benefits and protections under the ESA. For more information, read more on independent contractor misclassification. If you think this might be you, it is important that you consult with an employment lawyer to enforce your rights.

What should be included in an employment contract?

Employment contracts can cover a variety of topics, most commonly routine information such as wages, job responsibilities, and hours.  

Other clauses in employment contracts may deal with matters that are guaranteed by law and can only be improved upon in the employment contract. Most commonly, this includes vacation pay, statutory holiday pay, and overtime. These are protected rights under the ESA. Employers cannot contract out of the ESA, so they cannot contract out of these obligations. Your employer may choose to provide you with more vacation time or a higher rate of vacation pay than is specified in the Act, but they cannot provide you with less than what the ESA specifies. That would be an attempt to undermine the rights to which you are entitled pursuant to the Act. Clauses that provide you with worse benefits than what is guaranteed under the ESA are invalid and unenforceable.

Finally, there are clauses in contracts that you may not expect and that can limit your rights as a worker. Examples include layoffs and probationary periods. Your employer has no freestanding right to subject you to a layoff or a probationary period; these must be agreed to in the employment contract. So, generally, unless your contract states that your employment is subject to a probationary period of maximum 90 days, your employer cannot terminate you without at least paying severance pay.

What if my employment contract goes below what the ESA guarantees?

If your employment contract attempts to limit your rights beyond what is guaranteed by law, this is illegal. Just as your employer cannot pay you less than the minimum wage, they cannot pay you less termination or severance pay than what you are entitled to under the ESA. So, while very harsh clauses in your contract may seem intimidating, they actually work against the employer in that they may render the entire clause unenforceable.  

Many factors can render an employment contract unenforceable. Ambiguous or unclear language, which impedes upon a worker’s ability to understand the terms of the contract, can render the contract invalid. In that case, the clause is construed against the party who drafted it through a principle called contra preferentem. Similarly, signing under duress, which is when the worker’s signature was coerced or extracted against their free will, invalidates a contract. Examples of duress include when a worker is not given the opportunity to seek legal advice prior to signing the contract or when the worker is threatened with punishment if they do not sign (for example, if you don’t sign this contract, you are fired).    

The Court does not take kindly to employment contracts that violate the ESA. If even a hair is out of place, the courts will strike the offending termination clause in its entirety. Depending on the facts of the case, this may mean that the employee is then entitled to common law reasonable notice, which may mean additional money and protection for the worker. Please read more information on common law reasonable notice.

What if my employer wants to change my employment contract?

Employers can try to renegotiate an employment contract. However, unilateral and fundamental changes to employment arrangements can constitute constructive dismissal. This is true even if employers are attempting to change your employment contract given the pandemic and the implications of COVID-19.

If your employer suddenly decides to cut your wages, reduce your hours, demote you to a lower position, or otherwise meaningfully change your working conditions, you have several options on how to proceed and you may be entitled to remedies. Find out more about constructive dismissal.   

How can I tell if my termination clause is valid?

Termination clauses are meant to limit the employer’s severance pay liability and will provide how much the employer should pay in case of termination. Generally, if the termination clause is in breach of the ESA, then it will not be enforceable. It is important to consider the entire termination clause, not just the portion – with or without cause -that is applicable to your situation. To determine whether your contract limits your termination entitlements you will generally need to consult with an employment lawyer.

Employment contracts are confusing and complicated, and you may have signed one without fully understanding the meaning of the contract.  If so, your employment contract may be unconscionable and by consequence unenforceable. An unconscionable contract is an unfair deal that was entered into as a result of inequality of bargaining power. A recent case from the Supreme Court of Canada, Heller v Uber, 2020 SCC 16 clarified the court will not enforce “unfair surprises” against workers.

If you have a termination clause in your employment contract, it may very well be invalid. The recent court decisions in Waksdale v Swegon and Heller v Uber affirm that it is very important to have a legal professional assess your full contract and not just the clauses applicable to your particular fact situation.

What can I do to protect my rights?

There is a power imbalance between employers and workers that can be intimidating. Despite this, workers do have power in negotiation employment contracts and have rights that do not fade away simply because of a harsh contract. 

Here are our tips on how to negotiate a better employment contract for yourself and on what to do if you have already signed a harsh employment contract:   

    • Don’t be afraid to negotiate, where appropriate. You do have power – your employer chose to hire you, has invested resources in you, and is unlikely to revoke an offer of employment simply because you attempt to negotiate better working conditions. Seek legal advice on how to best improve your employment contract in your particular situation. 
    • Don’t rush to sign an employment contract. Even if your employer has given you a deadline to sign the contract, you can always ask for more time to read it over. Use that time to seek counsel.
    • Familiarize yourself with what your rights are under the ESA. You can read our blogs for more information on what your rights are in Ontario.
    • If your employer is not providing you with what you have a right to, either under the ESA or under your employment contract, you can take action to obtain those benefits. This can be done through a complaint with the Ministry of Labour or court. Seek legal advice to determine which path may be best for you.
    • If the employer is imposing excessively harsh obligations on you or unfair surprises, the contract might be invalid according to the Supreme Court decision in Heller v Uber.

Get legal advice from an employment lawyer at Monkhouse Law to protect yourself on the details of an employment contract. Employment law is complicated, and employment contracts can have a serious impact on your rights.  

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