Many of the mediations I handle involve an assessment of whether a contract of employment signed after the employee started working is enforceable.

Hopefully most readers already know that in order to have a binding agreement, there must be “consideration” flowing both ways. In other words, each party must receive some sort of benefit; although I rarely invoke Latin, I do like to refer to the need for a quid pro quo in this context.

If the individual already has the job, what are they getting in exchange for signing the contract?

In the world of Employment Law, we are often called upon to assess whether an employment agreement is enforceable. When the agreement was signed after the employee already started working, that becomes a critical issue. That is true because in most cases, the offer of employment is the consideration that the employee receives. The quid pro quo is that in order to get the job, they have to accept the terms and conditions in the contract. But if they already have the job, what are they getting?

As an aside, this is why having an employee sign their contract when they show up for work on their first day (or later) is a common but critical mistake; they have already been hired pursuant to a verbal agreement or perhaps an offer letter, so there must be some other form of consideration if an employer wants them to sign a new contract which presumably contains terms beneficial to the employer.

How much consideration is enough?

Lawyers used to talk about using a “peppercorn” as consideration. Years ago, I chaired an HR Law conference that included a Judges’ panel and at one point, I tried to put them on the spot by asking them what the minimum would be in order to constitute valid consideration when an employer tries to put a new contract of employment in place. They all chuckled nervously, and I said “what about a dollar?”, to which they laughed. When I pushed and said “what about $2? what about $100?”, they stopped laughing but could not give me a clear answer.

A recent decision, however, has shed some light on the issue and, although many employers feel as though the courts are never on their side, this may provide them with some good news for a change.

In Giacomodonato v PearTree Securities Inc., the Ontario Superior Court of Justice confirmed that the courts will not assess whether the consideration is sufficient, so long as the employee received something of value.

These excerpts are particularly relevant:

[44] Employment contracts require consideration, which is understood as a benefit to one party or some trouble, prejudice, or inconvenience to the other party. Generally, a pre-existing contract can not be modified unless there is a further benefit to both parties. As a matter of law, employers do not have the right to alter a contract unilaterally by adding new terms or diminishing the existing rights under the contract. Something new and of benefit must flow to the employee in exchange for the new promise.

[47] Courts have held that an employer’s promise not to terminate immediately an employee’s employment is not consideration that renders enforceable an amendment to the contract.

[48] Courts ensure that there is consideration for the contract, but the court is not concerned with the adequacy of the consideration.[18] As long as there is some consideration for the amendments to the contract, the court leaves it to the parties to form their own judgment over its adequacy and to make their own bargain.[19] The law does not require that the new benefits be in the form of money, or that the economic value of the new benefits provided to the employee equal or exceed the economic cost of the new terms of the agreement.

The judgment confirms that employers cannot unilaterally change an employment contract, and also that simply promising to continue employing the individual does not constitute valid consideration.

What I find particularly interesting, however, is that this judgment explicitly states that the courts will not be concerned about the value of the consideration or the fairness of the bargain. Previously, many employment lawyers were concerned that courts would not enforce a new contract where the employee gave up a substantial severance entitlement in exchange for a relative pittance. This case suggests otherwise, and that is why I say that employers should be quite happy about it.

The Court went on to find as follows,

[90] I find that PearTree provided Mr. Donato with additional paid vacation in the second employment contract, which amounted to fresh consideration. In addition, I find that the $40,000 bonus was consideration for the second employment contract, even though it was not referred to in the text of that contract.

[91] It is not role of the court to assess the adequacy of the consideration provided by PearTree or to assess whether or not the economic benefits obtained by Mr. Donato outweigh what he gave up. I observe, however, that neither two additional weeks of paid vacation nor $40,000 can be fairly described as a mere peppercorn. I find that the second employment contract is enforceable.

As a result, the second contract, which limited the plaintiff’s entitlement to notice of dismissal, was upheld.

Pith and substance

The ramifications of this decision are significant; it means that employers do not need to be worried that the consideration they provide in exchange for a new employment contract limiting the employee’s severance entitlement may be questioned and ultimately found to be insufficient. As long as the employee willingly agreed to the terms of the new contract, and there was valid consideration provided, then the contract should be upheld.

Of course, employers cannot force an employee to sign a new contract, and that is where the value of the consideration may become more important. Savvy employees will not agree to a new contract which limits their severance entitlements or otherwise takes away their rights unless they receive something of equal or greater value in return.