In Ontario, having clear employment contracts is not just a legal technicality – it is a strategic business move. Employment contracts define expectations, reduce legal risks, and help protect the business if an employee leaves or if a dispute arises. In this post, we will cover when to use employment contracts, why a written contract is critical, what essential elements it should contain, and the potential pitfalls of not having one in place.

When should employment contracts be used?

The short answer: Always.

Employment contracts should be used for every employee, regardless of their role, pay level, or whether they are full-time, part-time, or temporary. While the Employment Standards Act, 2000 (ESA) provides basic rights and protections, an employment contract sets additional terms that can be tailored to the specific role or company policies. Furthermore, without a contract clearly limiting an employee’s entitlements to those found in the ESA, said employee may be entitled to far more rights than an employer assumes.

Contracts are especially important in situations where job duties, employee responsibilities, and/or termination terms need to be clearly defined. For example, if you are hiring for a sensitive role involving access to company data, intellectual property, or client information, a contract can help safeguard that information and set restrictions around what an employee can do with it, even after leaving the company. Likewise, roles that come with bonuses and commissions (amongst other types of compensation) greatly benefit from having these details explicitly outlined in an employment contract and/or an accompanying agreement.

Should employers use written employment contracts?

Yes. Written contracts provide a documented agreement between you and the employee, leaving less room for misunderstandings or disputes. While verbal agreements are technically enforceable, they are far more vulnerable to misinterpretation and often end up defaulting to “implied” terms, as interpreted by Ontario courts.

A well-drafted, written employment contract can offer clarity and enforceability. Courts in Ontario give more weight to written contracts, provided they meet minimum ESA standards. In contrast, without a written contract, a court may determine employment terms based on industry norms and implied terms – a most notable example being “reasonable notice” for terminations, which can be far more costly to employers than the minimum notice period in the ESA.

How to write an employment contract: Key elements to include

A solid employment contract should contain the following essential elements:

• Job title and description: Include a clear job title and detailed list of duties and responsibilities, with the ability for the employer to change said duties when needed. This helps manage expectations and gives a clear basis for any role adjustments over time, reducing the risk of “constructive dismissal” claims.
  
• Compensation and benefits: Specify the employee’s salary, hourly rate, and/or commission structure, and outline any bonuses or benefits, such as health insurance or retirement contributions. Clarify if any bonuses are discretionary and set eligibility criteria, helping prevent disputes over promised earnings.
  
• Hours of work and overtime: Outline expected work hours and the company’s policy on overtime. The ESA has strict guidelines for overtime pay, so make sure the contract aligns with these rules, especially if the role is non-exempt from overtime.
  
• Probation period: Including a probation period, usually three months, allows employers to assess an employee’s fit with the role and company culture. If the employment ends during this period, notice or severance requirements may be minimal, provided the contract specifies probation terms.
  
• Termination clause: A well-drafted termination clause is critical in Ontario, as it can limit the employer’s liability to the minimum ESA requirements rather than “reasonable notice” under common law, which can be much more generous. The clause should be clearly worded to be enforceable in court, or the employer risks much higher termination costs.
  
• Confidentiality and non-disclosure agreements: Protecting sensitive business information is essential. Confidentiality clauses set clear boundaries for employees when handling proprietary or client information, both during and after employment.
  
• Non-solicitation and non-competition clauses: Ontario has strict rules around non-compete clauses, especially after recent statutory amendments to the ESA. However, non-solicitation clauses, which prevent employees from poaching clients or colleagues after they leave, are usually enforceable if well-drafted and reasonable in scope.

What happens if I do not have an employment contract?

Your business could face substantial risks without a clear, written employment contract. These risks span many areas, but none receive more attention than when an employee is terminated. In the absence of a written agreement, Ontario courts assume that common law “reasonable notice” applies when an employee is terminated without cause. Reasonable notice can be significantly longer than the minimum notice period under the ESA, depending on the employee’s age, role, and length of service, amongst many other factors. This can lead to higher severance obligations than an employer may have anticipated.

For example, if a 25-year employee is let go without a written contract, they could be entitled to 20-24 months of compensation, especially if they are in a senior or specialized role. These unexpected costs can be a major financial strain for many small to medium-sized businesses.

Furthermore, without a written contract, any dispute about compensation, role expectations, or confidentiality often defaults to what the court interprets as “reasonable.” This can result in the employee claiming entitlement to bonuses or compensation they believe were implied but that you may not have intended to offer.

Final thoughts

Employment contracts in Ontario are more than just a formality. A well-drafted contract offers clarity, sets realistic expectations, and helps protect an employer’s business. Employers can mitigate potential legal issues by including key elements like job descriptions, compensation, and termination clauses. And importantly, an employment contract allows both parties to know where they stand, ensuring a professional, transparent relationship from the beginning.

Consider reaching out for assistance in drafting or reviewing employment contracts to ensure they align with Ontario’s legal standards and fit your business needs.

By Filip Szadurski, Spring Law

If you want more compliance guidelines on employment contracts, try The Human Resources Advisor (TM), Canada’s top HR/Payroll compliance service, published by First Reference.