July 27, 2023

The Risks With Older Contracts

If you were an employee at any time during the 1980s, there’s a good chance that your employment contract looked fairly one-sided, that is if you had a written contract at all. Employment law was, for decades, known as ‘master and servant law,’ and in most cases, the employer had fairly unlimited control. This was great news for employers, but often far less beneficial for employees.

Then in the late 1980s, the tides began to turn. A series of influential court decisions showed that the law began to recognize the inequality in the employer-employee relationship, and began to lean in favour of giving employees the benefit of the doubt. This meant firmly entrenched rights for employees, and that employers could not contract out of these employee protections.

The law continues to change and evolve every week, month, and certainly every year. Between new pronouncements from provincial and federal governments and court decisions that can impact all employees, the contract that was drafted even just a few years ago may no longer be effective today. It may work fine if left undisturbed, but if challenged in court can offer a business little if any protection.

So what does this mean for employers who are still working with old employment contracts?

The Law

Employment contracts are intended, at their best use, to protect both employers and employees. These contracts themselves are not ‘an island,’ and a contract itself may not be the only document that forms the basis of an employment agreement. Many contracts will often reference further workplace policies contained in a separate manual that, when introduced and drafted correctly, can form a valid part of the contract. This is where employers have significant freedom to enact policies that they want in their workplace. No personal social media usage at work? No visitors allowed in the break room? No red coffee mugs? No problem!

Where old contracts are troublesome, however, is often in the employment agreement portion itself. While portions of the law do change frequently, the courts have been clear that these contracts cannot violate the governing employment law or statute – for most non-unionized Ontario employers the Employment Standards Act (the “Act”).

The Act sets out an employee’s minimum entitlements in key areas such as vacation time, overtime pay, and termination and severance. While an employer governed by the Act can offer an employee more than their legal minimums in a contract, they cannot under any circumstances offer them less. This may once have been an acceptable practice decades ago, but Courts have said firmly that this is no longer the case.

If a portion of a contract is silent on an issue or notes that it defers to the Act, then the relevant portion of the Act applies. When it comes to termination and severance pay, however, the default in the law is not the Act, but instead ‘common law reasonable notice’ – how long it might reasonably take that employee to find comparable new work, an amount often considerably higher than the minimums under the Act.

Thus in order to comply with the Act, or even offer amounts slightly above, employment contracts need to be worded very delicately to confirm, in indisputable language, that the amounts offered upon termination will not fall anywhere below the minimum entitlements under the Act, which can include termination pay, severance pay, and continuation of employee benefits. 

This is where old employment contracts often fall short. Many from 10, 15, or even 20 years ago that have not been revisited use language that may have been acceptable at the time that they were written, but that would no longer hold water in court today. If those old contracts have not been reviewed, and that employee is later let go (with or without cause), that contract may do little if anything to protect the employer.

The Changed Substratum Doctrine

There is another key area where an old contract can put any protections for the employer in jeopardy.

In the case of Celestini v. ShopLogix Inc., 2023 ONCA 131, the Ontario Court of Appeal recently upheld a principle of law known as the ‘changed substratum’ doctrine. This refers to cases where an employee’s contract is so old, and their role has changed so significantly, that the contract should no longer apply to that employee to the point where it is not enforceable.

For example, an employee starts in the mail room twenty-plus years ago under a very simple written agreement that offers them their minimum entitlements under the Act. In the last two decades, they have risen through the ranks of the company to become senior-level, high-earning manager. Throughout all of these various promotions, their initial employment contract was never updated and remains unchanged.

Should the employer let that employee go, it is unlikely that they would be able to rely on that old contract for any protection. Courts have ruled that a high-level executive, for example, is a very different role than a mailroom employee and that these material changes mean that one should not be bound by the other’s contract.

The Very Real Risks

So what risks are employers running if their old contracts would not survive a legal challenge? 

The answer varies depending on several factors, but the dollar amounts could be significant. A current employment contract that holds the employee to their minimums under the Act can max out an employee’s entitlements at 8 weeks’ pay in lieu of notice, plus benefits through that period, and a possible additional severance amount if the employer has a large enough payroll and the employee has been there more than 5 years. 

While these amounts seem high to some employers, they pale in comparison to what courts can award if a contract is not valid. When assessing reasonable notice, courts look at an employee’s seniority, tenure with the company, age, and market conditions – all of which impact how long it will take them to find a new comparable income.

Using that substratum example, a short-service employee with mailroom experience (that does not traditionally require specialized education or training) may only merit a few weeks’ pay in lieu of notice. However, a senior-level executive in a niche industry who is still under an old employment contract may be eligible for two years’ pay in lieu of notice or even more.

The Upshot

While there are serious risks to relying on old contracts, those risks are easily preventable. To quote the great Benjamin Franklin, an ounce of prevention truly is worth a pound of cure. While meeting with your employment lawyer annually to review and update your contracts may seem like a headache (although we try to make it painless), the cost savings, if anything goes awry, can be exponential. 

As an employer, you can’t always predict when you may need to let an employee go – it may be for cause, or may simply be due to unexpected business reasons. What you can do is be ready. Ensuring that your contract is up to date can mean the difference between paying an employee out for two months versus two years or more. Let’s make sure you’re ready for whatever comes your way. Contact our office today to set up a consultation.