How to Amend an Employment Contract … Lawfully

By David Doorey, York University

Classes in Employment Law that use my text The Law of Work are probably close to exploring how employment contracts can be amended under the Common Law model (Chapter 7, Requirements to Create and Modify Employment Contracts).  We discuss in that chapter a variety of scenarios including (1) the situation in which the employer proposes an amendment and the employee agrees to the change, and (2) the situation in which the employee does not agree to the proposed amendment.

The first lesson is that an employer cannot just unilaterally modify the terms of an employment contract without the employee’s agreement.  To amend an employment contract, there needs to be Offer, Acceptance, and Mutual Consideration.

Amending Employment Contracts When the Employee “Agrees” to the Change: Mutual Consideration

In most of the cases that deal with the legality of contract amendments, the employer has attempted to change the contract in a manner that benefits the employer, such as by reducing the amount of notice that is required to terminate the employee or by reducing the employee’s compensation, for example.  Frequently, the employer drafts up a new revised contract and presents it to the employee for their signature (i.e. “acceptance”).  The employee usually signs the revised contract because they don’t want to piss off their employer and maybe they are concerned that if they don’t sign, the employer will just fire them.

In these cases, when the employee agrees to the modification, the main legal question becomes whether both sides received fresh consideration.  That means that both sides, the employer and the employee, receive something new of value that they were not already entitled to before the modification.  So, for example, if the employer is modifying the contract to reduce the amount of notice of termination required, that is a benefit to the employer. However, if that is the only change made, then that change will not be legal enforceable, even if the employee signs the change. Acceptance cannot cure a lack of mutual consideration.  The problem in that scenario is the modification is entirely one-sided in the employer’s favour.  What new benefit the employee receive?  Nothing.  Years later, when the employer attempts to rely upon the written notice of termination clause in the modification that the employee signed, the employee can simply say, “sorry, but that amendment I signed is unenforceable because I received no “fresh” consideration when I signed it. This is the lesson from cases like Francis v. CIBC,  Redjak v. The Fight Network, discussed in the textbook,  and many other similar cases.

If the employer wants to make a change that benefits the employer, even if it obtains the employee’s agreement, that change still needs to be supported by mutual consideration.  What does that mean?  If I were the employer, I would simply offer the employee a signing bonus of some sort. “In consideration” for the employee agreeing to this change that benefits the employer, the employer will pay the employee a one-time bonus of $500, for example.  Now you have offer, acceptance, and mutual consideration to support the amendment.

But What if the Employee Doesn’t Agree to the Change?

Now imagine that the employer approaches the employee and says, “we’d like to amend your contract in the following manner that benefits the employer” and the employee says, “no thanks”.  In this scenario, there is no acceptance of the employer’s offer to modify the contract.

The employer then has a choice to make.  It can drop the proposed change.  But if it insists on making the change, then it needs to lawfully terminate the employment contract (Contract 1) by providing the employee with whatever notice the contract requires.  Once that notice period expires, Contract 1 comes to a lawful end.  At that point, the employer can offer a new contract (Contract 2) on whatever terms it wants.

For example, if Contract 1 requires 8 weeks’ notice of termination, then the employer can inform the employee that “we are hereby giving you notice that we are terminating your employment contract effective 8 weeks today…”.  Then, the employee works out the 8 weeks at which point Contract 1 ends.  The employer can then offer a new contract.  To an alien looking down at the workplace, it might look like nothing has changed, but legally speaking, Contract 1 ends on Friday and Contract 2 begins on Monday.  This is the lesson of cases like Wronko v. Western Inventory (LOVE this case) and Hill v. Gorman, and others like this.

An interesting example of all of this is the case I mention on page 107 of The Law of Work, called Lancia v. Park Dentistry .  In that case, the employer decided it wanted to make some changes to Lancia’s contract that benefitted the employer, including changing how vacation pay is calculated such that Lancia would receive less pay and reducing the amount of notice of termination required. On August 14, 2014, the employer informed Lancia in writing that it was giving her 18 month’s notice that it was terminating her existing employment contract (Contract 1). That period was assessed considering what a court would order as “reasonable notice” given Lancia’s service length, age, and consideration of other “Bardal Factors”.  Contract 1 would thereby terminate on February 12, 2016.

However, the employer also informed Lancia that she could also agree to the changes sooner, and if she did so the employer would pay her a $2000 signing bonus.  Lancia elected to take the signing bonus and she signed the new modified contract almost immediately.  Two years later, Lancia quit and sued the employer for constructive dismissal on the basis of alleged harassment and also the changed contract terms that led to a cut in her compensation.

Lancia lost.  For our purposes, the key point is that the Court found that the employer had implemented the plan to modify Lancia’s contract properly.  It gave her proper notice that it was terminating Contract 1 in 18 months’ time.  However, it also provided Lancia with the option to accept the changes sooner and if so, she would receive fresh consideration in the form of a $2000 signing bonus.  This was clearly a bad deal for Lancia, because she lost more than $2000 in reduced compensation under the new terms than if she had simply worked out the 18 months notice period.  However, the Court noted the old rule that the mutual consideration need not be “equal”

Park Dentistry was not required to offset the reduction in compensation by providing monetary consideration of an equal amount.  Indeed, it is trite law that courts will not inquire into the adequacy of consideration – a “peppercorn” will do.  As long as there is consideration, contracts may be varied or superseded by new agreements. (para. 54)

Lots to consider in these contact amendment cases.  However, for employers and employees alike,  if you understand the basics of contract law, it makes it immeasurably easier to work your way through legal problems and to make informed decisions.