Changing an Employment Contract
Under Ontario employment law, in order for a contract to be legally binding, consideration — which means a benefit to one party or a detriment to the other — is generally required. This holds true for employment contract as well. If an employer seeks to amend an existing agreement, they must provide “fresh” consideration (e.g., a signing bonus or other given to the benefits) for the employee’s agreement to sign the new terms of employment. Alternatively, an employer may terminate the existing contract and create a new one, though this comes with the requirement of providing appropriate notice to the employee, which could be lengthy.
The key issue is determining what constitutes sufficient consideration to make the amended employment agreement legally binding. In fact, this an issue that often comes up for employment lawyers in Ontario assisting employers.
In a recent case called Giacomodonato v PearTree Securities Inc., 2023 ONSC 3197, the court shed light on how courts assess consideration when a case involves changing an employment contract.
Case Background
The employee, after leaving his previous job, accepted an offer from the employer to join their team. Initially, they entered into an employment contract. However, due to the employee’s potential financial losses from leaving his prior employer, the parties renegotiated the terms of employment. As a result, the employer agreed to compensate him with a payment of $40,000 to cover his costs of severing his contract with his previous employer, resulting in the second employment contract. However, the $40,000 payment was not explicitly mentioned in the new employment contract.
After termination, the employee sued his employer for wrongful dismissal, where he was successful. However, the court awarded him wrongful dismissal damages (severance package) based on the terms of the second employment contract, whereas he felt it should have been calculated using the first employment contract. Therefore, the employment dispute centred on whether or not the second employment contract was legally valid and enforceable, which in turn depended on whether the employer provided him with “fresh consideration” to make it binding.
For his part, the employee argued the new employment contract was not legally valid and enforceable because he was not given any new “consideration” (or financial benefit). He also argued that, overall, in changing an employment contract, he was put at a disadvantage because it now had termination clause that set a limit to his future termination entitlements, expanded restrictive covenants and change in the variable compensation structure.
On the other hand, the employer argued the new contract was overall more advantageous to the employee, including the payment of $40,000 payment and additional 2 weeks of paid vacation, which amounts to “fresh consideration” it provided to the employee for the new employment contract.
As is typical in employment contract disputes, the court refused to engage in a comparative analysis of the advantages and disadvantages of the two employment contracts. The reason is because the courts have said that, other than in very exceptional cases, such as of duress or unconscionability, the courts will not assess whether the value exchanged is fair and proportionate.
In other words, the courts generally apply a rule known as the “peppercorn theory” when refusing to consider the adequacy of consideration in a new employment contract. This rule states that even a nominal or minimal amount of consideration (such as a “peppercorn”) is sufficient to make a contract legally binding. In the context of employment contracts, courts will typically not assess whether the consideration (e.g., wages, benefits, or other terms) is adequate or fair, as long as there is some form of consideration. The focus is on whether something of value is exchanged, not its actual worth.
In practice, this means that if an employee and employer agree to terms, and there is at least some consideration (even if it is a small or symbolic amount), the contract will usually be upheld, regardless of whether the consideration is seen as equitable or substantial. This principle ensures that courts do not get involved in scrutinizing the fairness or sufficiency of the exchange between the parties in a contract.
To summarize this point, the judge in this case held:
“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.”
As a result, the court found that the payment of $40,000 and additional 2 weeks of paid vacation to the employee was “fresh consideration” to make the new employment contract legally valid and enforceable.
The Ontario Court of Appeal upheld the lower court’s ruling, reaffirming his statement that “courts are concerned with the existence, rather than the adequacy, of consideration.” The Court also noted that the employee did not provide any legal authority to support his argument that the judge needed to compare the overall advantages and disadvantages of the first and second contracts when determining whether there was fresh consideration for the latter.
Take-Away Lessons
This decision helps confirm the general rule that, in providing “fresh consideration” to make a new employment contract legally valid and enforceable, employers do not need to provide a specific amount of financial compensation (although typically employers make it clear they will provide either a signing bonus or an increase in the employee’s salary). In other words, the courts simply want to see there was at least something of value that was exchanged, as opposed to assessing whether the amount was fair and reasonable. As the court noted:
“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.”
However, employment lawyers for employers will always advise companies to take reasonable steps before asking employees to agree to changing an employment contract. At all times, it is important to ensure the new employment contract is signed voluntarily (without exerting pressure, threats or duress), and also clearly reference the new “fresh consideration,” such as a specific bonus amount, new salary amount, or additional weeks of paid vacation.
A termination of employment is a difficult and confusing time, especially when it comes to reviewing a severance package, negotiating a severance package, or understanding the impact on an employees’ rights when it comes to changing an employment contract. Therefore, in a wrongful termination of employment, it is important for employees to consult with an employment lawyer for a severance package review to understand the impact of wrongful dismissal on pension plans. If you are an employer or employee needing to speak with an experienced Ontario wrongful dismissal lawyer to discuss your options and next steps on how to deal with workplace issues, call Bune Law, employment law firm in Toronto. You will review and get guidance on your severance package before you agree to sign any termination documents, and help ensure that your severance package is fair and reasonable.