Amending employment contracts a tricky affair, The Law Times (November 30, 2015, p. 7)

Modifications to contracts have traditionally encountered problems of enforceability, because of the requirement that enforceable promises must be given for consideration. Consequently, dismissed employees often challenge the enforceability of their employment contracts, a trend that shows no signs of abating. A case in point is Holland v. Hostopia.Com Inc., where the Ontario Court of Appeal was asked to resolve a slew of issues ranging from the amount of damages to enforceability of the post-contractual modifications. The court re-affirmed that the absence of “fresh” consideration to support an amended agreement renders it unenforceable and entitles dismissed employees to common law damages, including commissions. The length of reasonable notice is to be determined by the circumstances existing at the time of dismissal, and not by the amount of time it takes an employee to find employment.

Hostopia.Com Inc. had hired Sean Holland as its national account manager in May 2003 pursuant to a letter of hire, which was silent about his entitlement to notice of dismissal. Nine months later, he was presented with, and accepted, the employment agreement, which contained a new termination provision limiting his entitlements at dismissal to the statutory minimums set out in the Employment Standards Act, 2000.

After seven years of employment, Hostopia.Com Inc. terminated Holland’s employment without cause and he sued. At trial, the justice held the termination provision was enforceable, and dismissed the action. Holland appealed.

Ontario Court of Appeal Justice George Strathy reversed the trial judge’s decision in part and awarded Holland common law wrongful dismissal damages equal to eight months of total compensation.

Fresh consideration is a must

Dealing with the enforceability of the employment agreement, Strathy explained that once Holland accepted the employment letter, it constituted a complete contract of employment under which he was employed for a subsequent nine months. Because it contained no termination provision, there was an “implied term” that Holland was entitled to reasonable notice of dismissal. Strathy disagreed with the trial judge’s view that the two agreements were interrelated and together constituted a single contract of employment, thereby eliminating a need for fresh consideration. Instead, he found that the two documents were inconsistent. The agreement introduced a novel and “very material term” into the existing contract, which attempted to limit Holland’s entitlements at dismissal to the statutory minimums. Since Holland neither previously consented to that term nor received fresh consideration for accepting it, the express term contradicted the implied term of reasonable notice, which amounted to a “tremendously significant modification” of the existing employment contract.

Noting that a promise to perform an existing contract is not consideration, Strathy resolved that without fresh consideration the agreement could not displace Holland’s entitlement to reasonable notice contemplated in the earlier hiring letter. In support of his conclusion, he relied on reasoning in Hobbs v. TDI Canada Ltd., which held that the requirement of consideration to support an amended agreement is especially important in the employment context, because there is, generally, inequality in bargaining power between employers and employees.

While some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment, once they have been hired and are dependant on the remuneration of the new job, they become more vulnerable. The law recognizes that vulnerability and requires the courts to be vigilant when assessing the requirement of fresh consideration for contractual modifications.

Speed is not a factor

Strathy determined that Holland should be entitled to reasonable notice. He observed that the eight months’ notice assessed by the trial judge was at the “very low end of the range.” In determining the period of reasonable notice, the trial judge took into consideration the “speed” with which Holland found new employment — it took only three months. Dealing with the “speed” factor, Strathy made it clear that reasonable notice is to be assessed on the basis of the circumstances existing at the time of dismissal and not by the amount of time that it takes the employee to find employment. The time it takes to find a new job goes to mitigation of damages, not the length of notice.

Commissions

Significantly, Strathy found that Holland’s damages were to be calculated on the basis of his salary and commissions to which he would have been entitled during the eight months’ notice. Entitlement to commissions was based on the rationale that it took time for Holland to generate commissions at his new job. The Ontario Court of Appeal’s recognition of the dismissed employees’ entitlements to commission during the reasonable notice period is a welcome reaffirmation. This said, there is particular difficulty in determining lost earnings when an employee is partially remunerated by commission. The court will attempt to project what commission would have been earned during the notice period by taking into consideration numerous factors, such as commissions earned by the employee’s replacement, projections based on the general sales results of the company, and the time it took the employee to earn commission at the new job, among others.

Holland serves as a helpful reminder to employers that changed circumstances may render the original terms of an employment contract unenforceable. While the parties may agree to a change, the rule that an existing contractual obligation cannot amount to fresh consideration for the change may defeat the employer’s aims. This difficulty can be circumvented if an employee is offered ‘fresh’ consideration, being a thing of value that is not already due. Employers’ failure to do so can lead to augmented damages.

Prudent employers should seek legal advice prior to modifying their employees’ existing contracts. Diligent employees should question post-contractual modifications and especially those that seek to minimize their entitlements at dismissal.