Are written employment contracts necessary?

Written by on May 10, 2008 in Published Articles

Published in The Canadian Employer, May 2008

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Is it worthwhile for a small employer to go to the trouble of drafting written Employment Contracts? What are the risks of “keeping it casual” with employees and foregoing this formal document?

It is wise to consider the protection that Employment Contracts provide to both employers and employees. While it is true that most employment relationships begin with a brief hiring letter stating the job title, start date, wages, vacation and benefits, the remaining terms are implied into the employment agreement by the common law. What may or may not be known to employers is that courts view employees as being vulnerable and in need of the Court’s protection. A well drafted Employment Contract provides certainty and clarity with respect to issues that may arise throughout the employment relationship and at the time of the employees’ departure. Such certainty and clarity reduces the risks of disputes, litigation and limits the company’s liability.

Common areas of misunderstanding are: whether or not the offer is conditional or firm, whether the term of work is fixed or indefinite, the scope of the position, including the job title, reporting structure, hours of work, geographic location, the probation period, remuneration, benefits, confidentiality, notice upon termination, disability and absenteeism, ownership of intellectual property, and competition and solicitation prior and after departure. Let us briefly examine a few of these issues.

Scope of Position

As companies are not likely to remain static, employers may have a need to modify an employee’s job title, reporting structure, hours of work and perhaps geographic location. An Employment Contract can permit a fundamental change in an employment relationship, which would otherwise be considered constructive dismissal, in which event the company would be required to provide notice to the employee.

Probation Period

If an employer wishes to institute a probationary period for a new employee, this must be provided for in the Employment Contract. There is no implied common law probation period, nor is there a probation period in the Employment Standards Act, 2000. Rather, the law implies that an employment law relationship can only be terminated by providing reasonable notice, unless there is just cause. Notice is required even if an employee has worked for less than the typical contractual probationary period of 3 months. In some cases, notice is required even if an employee did not start work, although having been hired. An Employment Contract can contain a probationary period for the purpose of assessing the employee’s suitability with the Company and limit the amount of notice, if any, required to be paid to the employee.


Confusion often arises with respect to the terms of remuneration, in particular the commission or bonus structure, usually as a result of the parties being anxious to enter into the employment relationship. Disputes commonly arise at the time of the employee’s departure with respect to whether or not commissions or bonuses are payable for past work. If there is no agreement and if commissions or bonuses would have been received by the employee had the work relationship continued, the employee will likely argue with success that they are entitled to such commission or bonus. A well drafted Employment Contract can specify whether there is an entitlement to commission or bonus for past work at the time of departure, as well as limit such entitlement if so desired.

Notice upon Termination

Absent a clause in an Employment Contract limiting notice, employees are usually entitled to substantial notice that can be provided by working notice, salary continuance or a lump sum payment, or any combination of these. It is possible to limit notice to the minimum notice under the Employment Standards Act, 2000, to approximately about one week per year of employment to a maximum of 8 weeks for 8 years of employment or more, and severance if it is applicable. If notice is not properly limited to the statutory minimum in an Employment Contract, common law notice must likely be paid, which could be 6 months for a 6 month employee and in some situations a long term employee can be entitled to 24 months notice or more. It makes sense for an Employment Contract to limit, in certain situations, common law notice or perhaps eliminate it altogether, along with specifying whether notice consists of only salary, or also commissions and/or bonuses.

Disability and Absenteeism

What happens when an employee becomes disabled or is absent? Honda Canada Ltd. faced this situation and dealt with the employee improperly, and as a result were ordered to pay punitive damages of $500,000 to the employee. This amount was later reduced by the Court of Appeal and was appealed to the Supreme Court of Canada on February 20, 2008. A properly drafted Employment Contract should clearly define the employee’s and employer’s obligations in the event of illness.

Non-Solicitation & Non-Competition

It is critical in many situations that Employment Contracts be drafted so that companies prevent departing employees from soliciting existing customers, clients, suppliers, and distributors, or from soliciting the employer’s employees or contractors or that departing employees be prevented from establishing or supporting a competing business or working for a competitor in the industry.

Considering the enormous cost of litigation today and the protection afforded by Employment Contracts, no employment relationship should begin without a properly drafted Employment Contract.

Authors: Ronald S. Minken, B.A.(Hon.), LL.B. is a senior lawyer at Minken & Associates P.C., an employment law boutique located in Markham, Ontario. He Can be reached at (905) 477-7011 or www.EmploymentLawIssues.ca

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