Variation of Employment Contract Terms
Employers may seek to amend employment contracts during business restructuring or when demoting an employee. However, a unilateral alteration of an essential term in an employment contract can give rise to constructive dismissal, entitling the employee to sue the employer for damages. The courts have held that an employee must willingly accept a proposed variation, in addition to receiving consideration, for the new contract to be enforceable.
Unilateral Variations and Constructive Dismissal
The Supreme Court of Canada has held that if an employer decides to unilaterally make substantial changes to the essential terms of an employee’s contract, and the employee does not agree to the variation and leaves their job, the employee has not resigned, but is considered to have been dismissed.[i]
To reach the conclusion that an employee has been constructively dismissed, the court must therefore determine whether the unilateral change(s) imposed by the employer substantially altered the essential terms of the employee’s contract of employment.[ii] For this purpose the judge must ask whether, at the time the offer was made, a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed.[iii] Typically, demotions, changes to the method of calculating an employee’s remuneration, or significant reductions in an employee’s income, will be viewed as a substantial alteration to an essential term of the employee’s contract.
As part of the employer’s managerial authority, an employer can make changes to an employee’s contract that are allowed by the contract. Such changes to the employee’s position will not be characterized as changes to the employment contract, but rather applications thereof. Therefore, the extent of the employer’s discretion to make changes depends on what the parties agreed when they entered into the employment contract. [iv]
In Wronko v. Western Inventory Services, the Ontario Court of Appeal held that where an employer seeks to vary contractual terms, the employee has the following three choices:
- The employee may accept the variation and a new contract is formed;
- The employee may reject the variation and sue for damages based on constructive dismissal if the employer proceeds with the change without the consent of the employee;
- The employee may reject the change and continue on working under the established terms of the original employment contract. In this case, the employer may:
- Respond to the rejection by terminating the employee with reasonable notice or pay in lieu of notice, according to the termination provision in the employee’s contract, ensuring that the provision does not fall below the minimum standards in the Employment Standards Act, 2000, S.O. 2000, c. 41 or the common law reasonable notice period, if applicable. The employer may then offer re-employment on new terms, or;
- Acquiesce to the employee’s position and allow the employee to continue to perform his or her job on the existing terms of the original contract.
What Qualifies as “Good Consideration” for the Variation of an Employment Contract?
As the general principles of contract law stipulate, a variation of an employment contract requires fresh consideration to be enforceable. In other words, for the contractual variation to be legally enforceable the employee must be given something of value, such as a monetary signing bonus or a raise in salary.
Ontario courts have firmly held that the continuation in employment is not good consideration. The employer must pass something to the employee beyond that to which the employee is entitled under the original contract. In Hobbs v. TDI Ltd. the Ontario Court of Appeal stated 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 as consideration for the new terms”.[v]
That said, in Techform v. Wolda the Ontario Court of Appeal held that forbearance from dismissal for a reasonable amount of time is adequate consideration.[vi] When an employer forbears from exercising its contractual right to dismiss without cause on notice, the employee receives job security that s/he did not have under the original contract. However, this will clearly not be good consideration if the employee has already been promised or contracted to be employed for a certain amount of time.
The courts acknowledge that in the employment context there in an inequality of bargaining power between employees and employers. Given this, undue influence is presumed and the courts tend to interpret the circumstances surrounding the signing of the employment contract against the employer’s interest. Therefore, if the contract is not reasonably fair, it might be struck down. A contract will more likely be struck down as unconscionable or as executed in a situation with an inequality of bargaining power if some or all of the following conditions exists:
- -The employee is in no position to negotiate contractual terms or signs the contract under duress;
- -The employee signs a standard form or does not understand that by signing a document, he or she is contractually bound by it;
- -The employee is provided with far less than what his or her legal rights would have been in the absence of a contract;
- -The employee is provided with no opportunity to seek independent legal advice or otherwise signs under duress in a situation with an inequality of barraging power;
- -There is no negotiation;
- -The employee was not given the opportunity to read the contract or the employer inserted a term into the contract without the employee’s knowledge; and/or,
- -The contract is contrary to public policy or otherwise illegal.[vii]
While unequal bargaining power in and of itself will not be sufficient to invalidate a contract, employer’s should take care to ensure that employment contracts are reasonably fair and that employee’s are not signing under duress.
An employer can make changes to an employee’s contract that are allowed by the contract, as part of the employer’s managerial authority. However, if an employer decides to unilaterally make substantial changes to the essential terms of an employee’s contract, and the employee does not agree to the variation and leaves their job, the employee has not resigned, but is considered to have been dismissed, and the employee can sue for damages. The courts have held that an employee must willingly accept a proposed variation, in addition to receiving fair consideration, for the new contract to be legally enforceable.
An employee’s denial of or consent to contractual variations should be secured in writing. An employee’s consent can be recorded by way of an amending agreement to the employment contract.
By: Marni Outerbridge & James Prosser
[i] Farber v. Royal Trust Co.,  1 SCR 846, 1996 CarswellQue 1158 at para 24 (SCC).
[v] Hobbs v. TDI Canada Ltd., 246 DLR (4th) 43, 2004 CarswellOnt 4989 at para 32 (ONCA).
[vi] Techform Products Ltd., v. Wolda, 56 OR (3d) 1, 2001 CarswellOnt 3462 at paras 18 – 30 (ONCA).
[vii] This is a non-exhaustive list of factors that a court might consider when deciding whether a contract is unconscionable.
The content of this article is intended to provide a general guide to the subject matter and is not legal advice. Specialist advice should be sought regarding your specific circumstance.