Too Little, Too Late. Employer Could Not Impose New Terms via Contract after Employee Accepted Letter of Offer

What happens when a potential employee signs a letter of offer, which letter makes reference to an employment agreement “to follow”, the terms of which agreement differ substantially from what is contained in the offer letter? Will the court uphold the terms of the full contract?

Put another way, can an employer make a basic offer of employment to a candidate, advise the candidate that he will be required to sign a full employment agreement at some later time, and then impose new terms via that full contract?

I have repeatedly answered that question in the negative, see e.g. No Changes Without Consideration, published June 2, 2012. More recently, on November 10, 2015, (and with much more authority) the Court of Appeal for Ontario, in its reasons for decision in Holland v. Hostopia.com Inc., 2015 ONCA 762 (CanLII) said exactly the same thing and for essentially the same reason.

Facts

The plaintiff employee was hired by the employer as a National Account Manager, a sales position, pursuant to an offer of employment contained in a two-page letter dated May 13, 2003 (the “Offer Letter”).

The Offer Letter described the essential terms of employment, including salary, commissions, benefits and vacation. The offer could be accepted by returning a signed copy of the letter and “the subsequent signing of an employment agreement.”

The letter said nothing about the employee’s entitlement to notice of termination. Nor did it contain details of his commissions.

The employee signed the letter, indicating his acceptance of the offer, on June 9, 2003.

On the same date, the employee signed a Code of Business Conduct and a Proprietary Rights Agreement. The latter contained a 6-month non-competition provision and a 12-month non-solicitation provision. Neither document dealt with termination or notice periods.

Some nine months later, the employee was presented with a six-page Employment Agreement, dated February 18, 2004, which he signed on March 8, 2004 (the “Employment Agreement”).

The Employment Agreement recited that the employer had agreed to employ the employee subject to the terms and conditions set out therein. The operative provisions were preceded by a recital that the agreement was made “in consideration of the Employee’s employment by Hostopia and the compensation paid to the Employee from time to time while so employed”.

Much of the Employment Agreement was boilerplate. The contentious provision is clause 4.3, which allowed the employer to terminate the employee without cause or notice, provided it paid him in lieu of notice in accordance with the ESA.

The Employment Agreement had two express terms that varied the terms of the two documents signed along with the Offer Letter. Those new terms doubled the non-competition period to one year and the non-solicitation period to two years.

In the Employment Agreement, the employee acknowledged that he had read the agreement, understood its terms, was under no duress and knew he had the right to obtain independent legal advice and had either obtained such advice or waived it.

The employee’s employment was terminated by the employer on February 28, 2010, nearly seven years after he was hired.

On termination, the employee was paid accrued vacation pay, commissions for the months of January through March 2010, and the sum of $40,756.81 for “payments in lieu of notice.” The calculation of the latter amount is not entirely clear on the evidence. It was agreed at trial that it was at least the amount of his ESA entitlement to severance and termination pay.

The employee sued the employer, claiming damages for wrongful dismissal.

At trial, the Honourable Justice John MacDonald of the Superior Court of Justice dismissed the plaintiff’s action in its entirety.

Mr. Holland appealed to the Court of Appeal for Ontario and was partially successful. Of relevance to this post, he was successful in the argument that the Employment Agreement was not binding.

Decision

With respect to the issue of the enforceability of the employment agreement, Chief Justice for Ontario, the Honourable George Strathy held that the trial judge had erred in deciding that the contract was enforceable. In finding that the employment contract was not legally enforceable, Chief Justice Strathy wrote the following on behalf of the Court of Appeal:

[47] I turn first to the issue whether the termination provision in the Employment Agreement was enforceable, given that it was signed nine months after the appellant commenced employment pursuant to the Offer Letter, which said nothing about notice of termination.

[48] As I have noted, the trial judge considered this court’s decision in Hobbs, but found it distinguishable because here there was consideration for a single contract made up from two closely related and consistent documents.

[49] With respect, the two documents were not consistent. They differed in at least one very material respect. Once accepted, the Offer Letter constituted a complete contract of employment. The appellant [the employee] was employed pursuant to the Offer Letter for some nine months before he signed the Employment Agreement. It was an implied term of the Offer Letter that he was entitled to reasonable notice prior to the termination of his employment: Francis v. Canadian Imperial Bank of Commerce (1994), 21 O.R. (3d) 75 (C.A.). As the Supreme Court of Canada observed in BG Checo International Ltd. v. British Columbia Hydro & Power Authority, [1993] 1 S.C.R. 12, at p. 31, “[t]he law has always treated express and implied terms as being equivalent in effect.”

[50] The Employment Agreement contained an inconsistent term. Instead of providing for reasonable notice, it limited the appellant’s entitlement to notice of termination to the statutory minimum set out in the ESA. There was no evidence of any discussion of the subject prior to the appellant’s acceptance of the Offer Letter, no evidence that he was told that the Employment Agreement would contain terms inconsistent with the Offer Letter and no evidence that he agreed to waive his right to reasonable notice of termination when he signed the Offer Letter. Accordingly, the Employment Agreement introduced a new, very material term, into the existing contract of employment – a term to which the appellant had not previously consented and for which he received no consideration.

[51] The common law entitlement to reasonable notice of termination has been described by the Supreme Court as a “necessary consideration” of an employment relationship: Machtinger, at p. 1024. This court has described an express term contradicting an implied term of reasonable notice as a “tremendously significant modification”: Francis, at p. 84; see also Braiden v. La-Z-Boy Canada Ltd., 2008 ONCA 464 at paras. 48, 57.

[52] It is well-settled that a promise to perform an existing contract is not consideration: see e.g. K.M.A. Caterers Ltd. v. Howie, [1969] 1 O.R. 131 (C.A.); Hobbs; Braiden. Fresh consideration was required: Francis.

[53] In my view, the law in this respect is a matter of simple fairness. It is also a matter of sound employment practice. As Juriansz J.A. noted in Hobbs, at para. 1:

Accepting an offer of employment and committing the next stage of one’s career to a new employer is an important life decision that most people make carefully. Instability in an individual’s life, and in the workforce generally, is minimized when the decision is made on the basis of complete and accurate information about the new position.

[54] Juriansz J.A. noted the importance of fresh consideration where an employer seeks to amend the employment agreement. He stated, at para. 42:

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. The law recognizes this vulnerability, and the courts should be careful to apply Maguire v. Northland Drug. Co, [1935] S.C.R. 32 and Techniform Products v. Wolder (2001), 56 O.R. (3d) 1 (C.A.) only when, on the facts of the case, the employee gains increased security of employment, or other consideration, for agreeing to the new terms of employment.

[55] Without fresh consideration, the Employment Agreement could not displace the implied term of reasonable notice contained in the Offer Letter. The result is that the appellant was entitled to reasonable notice of termination at common law. This impacts, potentially, his damages in lieu of notice and his entitlement to commissions that became payable after his termination.

In the result the Court found that Mr. Holland was entitled to reasonable notice of termination.

Commentary

As mentioned in the introduction to this post, this blog has previously considered the issue of employers putting written contracts of employment to existing employees without any fresh consideration and the perils of doing so. The court’s decision in Holland is really of no surprise, with both of Hobbs v. TDI Canada Ltd., 2004 CanLII 44783 and Francis v. Canadian Imperial Bank of Commerce (1994), 21 OR (3d) 75 (CA), and to a lesser extent McLean v. The Raywal Limited Partnership, 2011 ONSC 7330 and Fasullo v. Investments Hardware Ltd., 2012 ONSC 2809, being well-settled law.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.