Review employment contracts regularly or risk incurring extra costs

Too often, employers are surprised when their “perfectly drafted” employment contracts become obsolete at critical moments, resulting in unexpected costs or even legal disputes. Unlike other long-term commercial contracts, which are updated only when parties modify their deals, employment contracts require routine reviews to remain enforceable. Otherwise, the contracts, on which employers spent time and often legal fees, may fail to protect them or, worse, become a source of liability.

When reviewing employment contracts, employers need to consider several factors.

Has the nature of employment changed?

The nature of employment may have fundamentally changed, necessitating a new contract. For example, an employee’s job description may evolve to the point that they can argue, “The current job I am working on is so different from the one when I signed the employment contract, so the contract is obsolete.” In Celestini v. Shoplogix Inc., 2023 ONCA 131, the Ontario Court of Appeal upheld the motion judge’s decision that significant changes in an employee’s job responsibilities and compensation structure rendered the 12-year-old employment contract unenforceable. Consequently, the employee received 18 months of wrongful dismissal damages under common law instead of the 12-month termination notice stipulated in the contract. This resulted in an award of over $421,000 (later increased by over $37,000 due to another issue). This outcome could have been avoided if the employer had periodically updated the contract and spent a tiny fraction of the awarded damages on it. This could also play out in reverse. For example, if an employee is promoted to a supervisory position where overtime premium pay is no longer mandatory under the Employment Standards Act, 2000 (“ESA”), an outdated contract entitling them to overtime pay could lead to substantial overtime claims if accumulated over time.

Have there been significant employment law changes?

Even if the position remains the same, changes in the law can render a previously solid contract unenforceable, often leading to wrongful dismissal disputes. Many employers understand that a valid termination clause is crucial for limiting termination costs and reducing disputes. However, courts closely scrutinize termination clauses, and doubts about their enforceability are generally decided in favour of the employee.

Are your termination clauses invalid?

In Waksdale v. Swegon North America Inc., 2020 ONCA 391 the Court of Appeal confirmed that an invalid part of a termination clause invalidates the entire clause, regardless of whether the employer relies on it. In this case, the employer could not enforce the termination without cause provision because the termination for cause provision was invalid, entitling the employee to common law reasonable notice instead of the contractual ESA minimum termination notice period. Before this decision, people rarely paid attention to their termination for cause provision, and a significant percentage of them were unenforceable.

Similarly, in 2024, the decision of Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029 provided employees with new grounds to challenge termination clauses. The court ruled that termination clauses allowing employers to terminate employees “at any time” or at the employer’s “sole discretion” are unenforceable since they contravene laws such as protecting employees during job-protected leaves, and, thus, the employee may be entitled to common law notice. This invalidates many termination clauses as “at any time” or “at sole discretion” are common fillers for contract languages, which people frequently use in termination clauses. In Dufault, the employee had a fixed-term contract, and the employer terminated her without cause, while the balance of the contract still had 101 weeks. The employer tried to rely on the termination clause. However, the termination clause was unenforceable for reasons including the ones mentioned above. As a result, the employee received the balance of her fixed-term contract—101 weeks—totalling over $157,000 plus interest and costs.

Following these decisions, employment contracts need prompt updates to prevent increased costs and legal disputes related to termination.

Do you include non-compete agreements?

Additionally, other contract clauses may be affected by legislative changes. For example, the Ontario legislature banned non-compete agreements under most circumstances in employment contracts entered into on or after October 25, 2021. Employers using outdated templates with non-compete clauses should update their contracts to include other restrictive covenants, such as non-solicitation clauses, to protect them. Otherwise, former employees might poach customers, suppliers, and employees to start competing businesses without worrying about recourse under the old contracts.

In summary, employers should review employment contracts routinely, at least once a year. Not every review will necessitate a formal update, and some updates can be simple fixes handled swiftly by experienced employment counsel at minimal cost. Employers will find this money well spent or regret not doing so.