Legal Blog

Consideration #2

Consideration issues sometimes arise in a contractual dispute. For example, if one party does not like the terms of a contract, it may argue that the contract is unenforceable because there was no consideration for it. This often occurs in an employment context. Two examples are set out in Braiden v. La-Z-Boy Canada Inc. [2008] O.J. No. 2314 (C.A.) and Rejdak v. Fight Network (2008), 67 C.C.E.L. (3d) 309 (SCJ).

Fired

In Braiden, employee worked for employer for 5 years. Employer then changed the terms of the employment and dictated that employee would be working as a salesperson on a commission basis only. 10 years later, employer decided it would enter into written contracts with its salespeople, stipulating that they were independent contractors. It did so in response to an audit that resulted in employer having to pay EHT and WSIB premiums for its salespeople. The contract made no changes to the standard terms of employee’s previous agreement, but added a new provision by which either party to the contract could terminate it on 60 days’ notice.

One year later, employer required employee to incorporate and operate through a corporation. Employer and employee’s corporation entered into the new independent contractor agreement. Employer and the corporation entered into six more annual contracts. Employer then terminated the contract giving 60 days’ notice. Employee sued for wrongful dismissal.

Employee

Although the contract that employer terminated was with employee’s corporation, the court had no difficulty in holding that the true relationship was with employee and that employee was not an independent contractor; rather, he was an employee.

The court noted that just because the contract refers to the corporation/employee as an independent contractor does not mean it is so. Instead, the court looks to a number of indicia to determine the true nature of the relationship.

In support of its determination that employee was not an independent contractor, the court noted:

1.   Employee worked full-time and exclusively for employer.

2.   Employee was subject to employer’s control regarding the products sold, the territory in which he could sell them, the promotional methods he was to use, and his sales obligations.

3.   Employee’s compensation consisted solely of commissions from employer. He could not sell elsewhere and had no expectation of earning a profit other than his fixed commissions.

4.   Employee was part of a group of sales agents. This sales force was the central method by which employer distributed its products.

Although employee supplied his own tools (e.g. car and home office), the other factors, which indicated that he was an employee, outweighed this factor.

Valid Contract

If the contract with employee was valid, employee was in trouble. Employer had given the exact notice that the contract required. The court first gave the policy reason behind the requirement of consideration in an employment context.

The requirement of consideration to support a change to the terms of an agreement is especially important in the employment context where, generally, there is inequality of bargaining power between employees and employers. Some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment but once they have been hired and are dependent on the remuneration of the job, they become more vulnerable.

The court then analysed whether there was consideration. It noted that a promise to do something a party is already bound to do, is not consideration. Since the only substantive change between the first written contract and the oral contract 10 years earlier, related to the insertion of a notice period that was already less than what employee would have received under common law, the court ruled that there was no fresh consideration.

Employer argued that employee had a tax benefit by being able to calculate his taxes as an independent contractor rather than an employee and, therefore, there was consideration for the contract. The court held that consideration had to flow from the employer, not from external sources such as tax legislation.

Employee had signed the contract because employer told him that if he did not sign it, he would be fired. Is that consideration? The court said no.

Are there circumstances in which an employer can impose a new contract without it being held void for lack of consideration? The court said yes. The easiest way is to give some consideration (e.g. higher pay, better working conditions, more perks etc.). Alternatively, if the employer does not wish to sweeten the terms of employment, it can provide consideration by agreeing that, if the employee signs the contract, then the employer will forebear from terminating the employee for a reasonable period.

Result

The court upheld the trial judge’s decision that employer ought to have given employee 20 months notice, rather than just 60 days.

Rejdak

This case deals with the importance of ensuring that an employment contract is signed before an employee starts work.

The parties led considerable evidence regarding the circumstances under which employee commenced his new job. Employee testified that employer had offered a job to him on a Friday. The offer set out the important aspects of the job (e.g. what he was to do, his salary, and his start date). One of the employer reps could not remember the conversation on Friday, but gave evidence of what he would have done. The judge did not find that evidence satisfactory. Another of the employer reps stated that there was no firm offer.

In any case, employee terminated his employment with his prior employer on the following Monday and commenced his employment with employer that same day. That day, employer gave employee an employment contract, which employee signed and returned on Tuesday. The employment contract stipulated that, during a three-month probationary period, employer could terminate employee without notice.

Employer terminated employee within the three-month period without notice. Employee sued.

Invalid

The judge held that there had been an oral contract on Friday and that there was no further consideration for the written employment contract signed on Tuesday. The kiss of death for employer was that employee had started work on Monday. Had employer not allowed employee to start work before he signed the employment contract, employer probably would have been successful.

The judge awarded 4 months’ salary for damages in lieu of notice.

The moral of the story can be applied to your own employees, not just those of your clients. Have a written employment contract with members of your staff and ensure that the contract is signed before the staff member starts work, not on the same or a following day.