Offer Letter Now, Employment Contract Later?

Court of Appeal Shows that this Approach can Cost Employers

In Holland v. Inc., 2015 ONCA 762, the employer did what many well-meaning but busy employers do when hiring a new employee: provide a bare-bones offer letter, and follow up with a more detailed employment agreement once the employee has settled in. However, as the Court of Appeal ruled in Mr. Holland’s case, when key terms and conditions are introduced only after an employee has started work, the employer may be unable to rely on them, and costly common law notice of termination requirements may apply.

Mr. Holland was hired by Hostopia as a National Accounts Manager. At the time of hiring, he signed a written offer of employment (“the offer letter”), which contained a statement that he would later be required to sign an employment contract (“the employment agreement”). He was also presented with a Code of Business Conduct and a Proprietary Rights Agreement, the latter of which containing non-competition and non-solicitation provisions. Neither document, however, dealt with termination or notice periods.

Nine months after starting work, Mr. Holland was presented with the anticipated employment agreement, which he signed. The employment agreement provided:

  • termination would be by notice in accordance with the Employment Standards Act, 2000 (ESA),
  • a recital that the agreement was made “in consideration of the Employee’s employment by Hostopia and the compensation paid to the Employee from time to time while so employed”, and
  • two terms that varied the period of the non-competition and non-solicitation clauses contained in the Proprietary Rights Agreement.

After seven years, Hostopia found that Mr. Holland’s sales performance was poor. Notwithstanding its allegations of poor performance, the employer terminated him on a without cause basis, and paid him an amount equal to his entitlements under the ESA. Unsatisfied with this sum, Mr. Holland sued Hostopia for wrongful dismissal.

In addition to claiming damages based on common law reasonable notice, the employee also claimed damages for lost commissions. During employment, Mr. Holland’s commission entitlement had been governed by a Non-Salary Compensation Memorandum, which stated that he was entitled to commissions if he attained certain sales figures, as well commissions on revenue that was “booked” by the employer on his client accounts. At the time of termination, Mr. Holland had been finalizing an agreement with a potential new customer. Although the account was not formalized until eight months after his termination, Mr. Holland sought damages for the commissions associated with that account as well.

When the trial judge dismissed Mr. Holland’s action for wrongful dismissal and upheld the employment agreement that limited his damages to the minimum amounts set out in the ESA, Mr. Holland appealed the decision to the Court of Appeal.

Enforceability of the Employment Agreement:

Regarding whether the employment agreement limited Hostopia’s liability on termination to the ESA minimums, the Court of Appeal found that the employer was out of luck.

Mr. Holland was employed pursuant to the offer letter for some nine months before he signed the employment agreement. Since there were no terms in the offer letter explicitly limiting his entitlements on termination to the ESA-provided statutory minimums, it was an implied term of the offer letter that Mr. Holland was entitled to common law reasonable notice.

The employment agreement then introduced a new, inconsistent term: notice on termination would be limited to the minimums contained in the ESA. As the employee had not previously consented to this term, and had received no new consideration in exchange for his agreement to it, the Court of Appeal found that the term could not be upheld. The Court disagreed with the trial judge, and found that the offer letter and employment agreement were not two interrelated elements of the same agreement; rather, the latter was a new agreement that required fresh consideration. As the Court stated, “Without fresh consideration, the Employment Agreement could not displace the implied term of reasonable notice contained in the Offer Letter.”

Finding that the appropriate range of damages for an employee in Mr. Holland’s position was eight to twelve months, the Court of Appeal decided not to interfere with the trial judge’s decision that, in the event the employment agreement was unenforceable, damages in the amount of eight months’ notice would be appropriate.

Entitlement to Commissions:

While the Court of Appeal held that Mr. Holland was entitled to be compensated for the commissions he would have been paid in the ordinary course of employment during the reasonable notice period, it upheld the trial judge’s finding that Mr. Holland was not entitled to commission with respect to the new client account he had been working on at the time of termination, for the following reasons:

  1. although he was the lead person on the new account, he did not find the new client; rather, he had worked with a large team of employees,
  2. Mr. Holland’s argument that he had obtained a “deal in principle” prior to his termination was not borne out by the evidence,
  3. Mr. Holland’s contribution to the new deal was assessed as a maximum of 15 percent, while the work done by other employees after his termination was much more significant, and
  4. Hostopia had not terminated Mr. Holland for the purpose of avoiding paying commissions on the new deal.

In the end, the appellate court allowed Mr. Holland’s appeal and awarded him eight months’ reasonable notice, including all salary, commission and bonuses he would have received during that time (less amounts already paid by Hostopia and mitigation earnings accrued during that period).

This decision demonstrates that, although important, a carefully drafted employment contract alone may not be enough to protect the employer on termination: both the timing of the introduction of the contract and the provision of appropriate, fresh consideration as required are vital in order to ensure that the employment contract will be enforceable. Specifically, new employees should sign their employment contract before their first day at work, and be provided with ample time to read the agreement and seek legal advice.  Bird Richard can assist employers in drafting and implementing employment contracts, both for new hires and existing employees.