When you’re about to start a new job, you may experience a flood of thoughts and emotions. Excitement. Eagerness. Trepidation. Perhaps a bit of anxiety. But one feeling you should not have, especially when it comes to your employment contract or offer letter, is confusion. Before you sign, make sure you fully understand the terms of your agreement.
What’s the Purpose of an Employment Contract?
Employment contracts are not simply a record of your negotiated salary, benefits, and other remuneration. Employers use these documents to manage their own risk and liability.
When it comes to hiring a new employee, there are three primary areas of concern that employers use the employment contract to address:
- Termination Provision: This clause dictates the employer’s obligation if they terminate the employee relationship. Or, in more plain language: what happens if they need to fire you or “let you go?”
- Restricted Covenants: Here, the employer will describe situations in which they restrict how the employee – you – will work after they leave the company. These covenants often include items such as non-solicitation and non-competition provisions.
- Provisions Related to Incentive and Commission-Based Compensation: If your role receives a significant amount of compensation tied into incentive pay or commissions, these provisions are important. This part of the contract stipulates how and when you would earn and receive this pay when the employment relationship comes to an end. If you are in sales, for example, and are terminated or quit right after closing a major deal, this clause will dictate how you will (or will not) be compensated for that work.
As you can see, these components of an employment contract can hold significant consequences for you as an employee. While your new employer is likely being fair and reasonable trying to manage their risk, it is your responsibility to manage your own.
The Risk of Signing an Employment Contract Without Careful Review
Let’s say in the excitement of starting a new job, you sign a contract without consulting with a lawyer.
What could happen?
Restrictive covenant provisions may affect your ability to find work: you may not be able to seek employment with competitors or business from current/former clients or customers. These provisions may be enforceable after the employment relationship ends whether you are terminated or you resign.
The bigger danger comes with the termination provision. This clause may limit the protections to which you are entitled at the time of dismissal.
For example, employers often include a minimum Employment Standards Act (ESA) termination clause (if they are provincially regulated) or a Canada Labour Code termination clause (if they are federally regulated). These two pieces of legislation detail the minimum obligations employers must adhere to when they terminate employees. Keyword: minimum.
But aside from these acts, we also have “common law.” In terms of employment, the common law requires employers to provide reasonable notice or payment in lieu of that notice at the time of dismissal. This is much more generous than the minimum legislative requirements and something you would be entitled to if you had not signed the employment contract.
A Termination Clause Case Study
Let’s take a closer look at: A manager in a small consulting firm had been with his employer for about 14 years and was in his 50s at the time he was dismissed. Under the ESA, the maximum amount of notice or payment in lieu of notice they were required to give him was eight weeks.
He had signed a contract stating that if he were terminated, he would be entitled to 90 days notice or pay in lieu of notice. This individual could have challenged his contract’s termination clause if his firm provided for less than the minimum requirements of the ESA. But they didn’t; they offered about one month more.
Here’s the truly unfortunate part of this case: under the ESA, companies with an annual payroll of $2.5 million or more must pay statutory severance for employees who have worked five years or longer. This firm was exempt from this requirement and so there was no statutory severance. But the former manager could have been protected under common law.
If he had not signed this contract, the judge could have assessed a notice period of 18 months and awarded him well over $100,000 under common law provisions.
Consult an Employment Lawyer
Signing a contract without review can have significant punitive consequences. This is particularly true for long-term employees and employees in small companies where common law entitlement could be much greater than the minimum legislative requirement.
Short-term employees are also at risk. For example, the ESA provides for just two weeks notice if an employee has worked for two years. Under the common law, depending on the person’s age and position, they could be entitled to considerably more.
When you enter a new job, you usually do so with hope. You want to trust your employer. And you should — after a lawyer carefully reviews your contract! Employers want to minimize their obligations; you want to maximize your protections. When you scrutinize the contract’s key provisions, you can enter into a mutually beneficial employment relationship.