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Employment Contracts: New Term? New Consideration!

David Elmaleh
David Elmaleh
Partner

December 2015

 

by David Elmaleh
First Published in the OBA Labour & Employment Law Newsletter

The recent judgment of the Ontario Court of Appeal in Holland v. Hostopia.com Inc., 2015 ONCA 762, sheds light on the (in)ability of employers to alter employment contracts after an employee has already commenced employment.

In this case, the appellant Sean Holland commenced employment with the respondent Hostopia.com Inc. on June 9, 2003 after signing a two page Employment Offer. The offer letter described the essential terms of the employment and stated Mr. Holland would also be required to sign an Employment Agreement. On the same date he signed a Code of Business Conduct and a Proprietary Rights agreement. None of the documents presented to Mr. Holland at the time he started working dealt with termination or notice periods.

Nine months later, Mr. Holland was presented with a six page employment agreement (the “Agreement”) which he signed on March 8, 2004. The Agreement included a provision allowing for the employer to terminate Mr. Holland’s employment without cause or notice, provided it paid him in lieu of notice in accordance with the Employment Standards Act (“ESA”). The Agreement included an acknowledgement that Mr. Holland had read the agreement, understood it, and was under no duress to sign it.

Mr. Holland’s employment was terminated by his employer almost six years later on February 28, 2010. On termination, he was paid accrued vacation pay, commissions for the months of January to March 2010 and $40,756.81 as payment in lieu of notice. It was agreed that this amount was at least the minimum that Mr. Holland was entitled to under the ESA.

Mr. Holland argued at trial that the Agreement was void because there was a lack of ‘fresh consideration’ and therefore, he ought to be entitled to reasonable notice at common law (rather than the less generous notice period under the ESA). The trial judge rejected Mr. Holland’s argument, finding that the Employment Offer and Agreement were related documents that together constituted one contract. The trial judge further found that the two parts of the contract did not contradict one another. The trial judge therefore upheld the validity of the Agreement and determined that the employer had paid Mr. Holland what he was entitled to under the ESA.

On November 10, 2015, Strathy C.J.O. for a unanimous Court of Appeal overturned the trial judge on this key issue. The Court of Appeal found that the Employment Offer acted as a complete stand-alone contract of employment, and the plaintiff was in fact employed under the terms of that contract for nine months prior to signing the Agreement. Since the initial Employment Offer did not expressly touch upon the issue of reasonable notice for termination without cause, it was an implied term of the contract that the plaintiff was entitled to the common law standard of reasonable notice. The Court of Appeal noted that the common law entitlement to reasonable notice of termination is a “necessary consideration” of an employment relationship, and therefore, the subsequent term of the Agreement providing for notice under the ESA constituted a “tremendously significant modification”.

It was determined that no fresh consideration was provided to Mr. Holland and therefore, the Agreement was unenforceable.

Given that the Agreement contained a significant modification to which the plaintiff had not previously consented to, the Court of Appeal ruled that fresh consideration was required. It was determined that no fresh consideration was provided to Mr. Holland and therefore, the Agreement was unenforceable.

What Does This Mean for Employers?

Holland v. Hostopia.com Inc. is a cautionary tale for employers. If employers intend to alter employment contracts after an employee has commenced employment, it is imperative to provide fresh consideration for any “significant modifications”. Simply altering the contract to ensure it is compliant with the ESA without providing new consideration gives rise to a risk of a court finding the modification unenforceable.

Consideration can be in the form of a raise or promotion, among other things. However, what is clear (and what the Court of Appeal once again highlighted in this case), is that a promise to perform an existing contract is not fresh consideration.

Download the pdf from the Ontario Courts site.to read the full case decision on Holland v. Hostopia.com Inc., 2015 ONCA 762.


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