Offer Consideration for Contract Changes

By Pushor Mitchell LLP
Categories: Blog, Employment Law

It is not at all uncommon for an employer to want to impose fundamental changes on employees during their employment. How the employer goes about making those changes will determine whether they are lawful (and, as a result, binding on the employee).

The employer has a broad discretion to alter certain minor aspects of the employment relationship without the employee’s consent. Significant changes to fundamental terms of the employment, however, may amount to what’s known as “constructive dismissal”.

A constructive dismissal is, in effect, a termination by conduct rather than by words. The employer hasn’t expressly stated that the employee has been fired but its actions amount, in the eyes of the law, to a rejection of the terms of the employment contract.

Unilateral salary reductions, demotions, and indefinite (unpaid) layoffs are examples of significant changes going to the heart of the employment relationship. When the employer attempts to impose these sorts of changes, it risks a claim of constructive (or wrongful) dismissal.

A constructively dismissed employee is entitled to monetary damages. These damages are often referred to as “pay in lieu of notice” (because the common law entitlement is the provision of reasonable working notice of termination).

Occasionally, an employer will attempt to justify the imposition of a significant change on the basis that the only alternative for the employee was to be fired. In legal terms, the employer is saying that it offered consideration to the employee (in exchange for imposing the significant change) in the form of its agreement not to terminate the employment.

This position is commonly taken by employers when defending the enforceability of a written contract imposed in mid-employment. At some later date, when the employment has ended, the employee challenges the binding nature of the contract (usually when suing for wrongful dismissal). When the courts get involved in determining whether the employment contract is binding on the employee, the concept of consideration is the all important factor.

That is because one of the key rules about employment contracts is that there must be consideration flowing to the employee in exchange for accepting the employer’s terms. This consideration must exist in order for the employment contract to be binding on the employee. Typically, the consideration flowing to the new employee is the offer of employment itself. But when a contract is imposed in mid-employment, there must be some other form of consideration.

The question of whether simply agreeing not to fire someone can amount to proper consideration has been the subject of debate in the courts for quite some time. The most recent word on this topic came from B.C.’s Supreme Court in the case of Krieser v. Active Chemicals Ltd.

In that instance, Krieser had been with Active Chemicals Ltd. for about 16 years. Soon after the employment had commenced, the employer asked him to sign an employment contract. That contract contained a severance clause significantly limiting the employee’s entitlements upon termination.

Many years later, the employer terminated the employment and sought to rely on the severance clause in the contract it had imposed. Krieser argued the clause did not apply to him because he received no consideration for signing the contract.

In response, the employer argued there was consideration in that it, effectively, offered the employee continued employment if he accepted the contract. Put another way, the employer argued that the employee knew if he did not sign the contract, his employment would be terminated.

The Court considered the authorities on the subject and concluded that it is not enough for the employer to simply show it intended to fire the employee if he did not sign the contract. Some additional benefit would have to flow to the employee (beyond continued employment for some unknown period of time).

The additional benefit could be greater security of employment through a promise not to terminate for some specified period of time. The key is that, to form proper consideration, there must be more than a bald promise that “we won’t fire you right now”.

In the Krieser case, the employer was unable to convince the Court there had been any additional consideration. As a result, the employment contract could not be enforced. The employee was awarded 13 months’ pay as damages (rather than the 6 months he would have been limited to under the imposed contract).

These are valuable, and potentially expensive, lessons for employers to learn about the enforceability of imposed contracts. Clearly, just getting an employee’s signature on a piece of paper is not sufficient.