All contracts require the legal elements of offer, acceptance, and a passing of ‘consideration’ between the contracting parties. Without these elements, the contract is neither binding nor enforceable.
These same principles apply when an employer varies a pre-existing employment agreement. Without fresh consideration, unilateral changes to an employment agreement may render the contract unenforceable.
Except for the rare case where an employment agreement explicitly provides otherwise, an employer cannot unilaterally change the employee’s terms of employment without providing fresh consideration. This may include, for example, changes to compensation, reduced hours, new benefits, adding a mandatory arbitration clause, or a limiting modification of the notice provision in the contract.
By unilaterally varying a contract, without fresh consideration, an employer runs the risk of an employee rejecting the change and bringing a claim for constructive dismissal.
What is Consideration?
At the formation of the employment relationship, the employer’s provision of compensation in salary or wages in exchange for the employee’s services will generally serve as sufficient consideration to bind the parties to an employment agreement.
The Ontario Superior Court in Brant Securities Limited v Goss, 2024 summarized the law on adequate consideration in the context of an employment agreement at para 35 as follows:[1]
Courts ensure that there is consideration for a contract, but the court is not concerned with the adequacy of the consideration. As long as there is some consideration for the contract, the court leaves it to the parties to form their own judgment over its adequacy and to make their own bargain. The law does not require that the new benefits be in the form of money, or that the economic value of the benefits provided equal or exceed the economic cost of the agreement.
However, when the employment agreement is varied to impose additional obligations or render existing terms more onerous, the question of consideration requires an analysis into whether the employee has received a new benefit.
What is Fresh Consideration?
The courts have been clear that in assessing an employment agreement signed where there is already an existing employer-employee relationship, they must consider whether fresh consideration was provided in exchange for a change in the required services of employment.[2]
‘Fresh Consideration’ means that the employee is receiving something new in return for his or her promise to be bound to the amended contractual terms added by the employer to the employment agreement.
Simply offering the employee continued employment in exchange for the employee consenting to the changes, in and of itself, will likely be insufficient. This is a departure from the general rule of commercial contracts, where forbearing to exercise a legal right is often considered valid consideration (in this case: forbearing to terminate the employee).
The Ontario Superior Court explained the rationale for this conclusion concisely in Kohler Canada Co. v Porter, 2002 when the Court stated that “[c]ontinued employment, without anything more of value passing to an existing employee, is not consideration for a new promise disadvantageous to the employee.”[3]
The court consistently reasons that the bargaining power between the employee and employer is inherently imbalanced. Unlike a commercial agreement, where two sophisticated parties seeking to vary a contract are generally perceived to have roughly equal bargaining power.
Accordingly, the courts have placed stronger emphasis on the requirement of consideration to support an amended agreement in the employment context, with the recognition that once an employee has become dependent on the remuneration of their job, they become even more vulnerable.
For example, more recently in Goberdhan v. Knights of Columbus, 2023, the Ontario Superior Court scrutinized whether the changes to the employment agreement actually benefitted the employee so as to amount to sufficient fresh consideration for a new more onerous termination clause.[4]
The defendant claimed that the new requirement for mandatory arbitration and mediation constituted consideration in the two contracts. The Court disagreed. It found that the changes amounted to an overall detriment to the employee and, as a result, the employment agreement was considered to be invalid for want of consideration.
Simply put, fresh consideration should take the form of a benefit flowing to the employee. In other words, there must be an improvement to the existing terms of the contract, such as an increase in the employee’s previous level of job security, wages or benefits.
Defining “Benefit Flowing to the Employee”
The law does not require that the new benefits be in the form of cash, or that the economic value of the new benefits provided to the employee equal or exceed the economic cost of the new terms of the agreement.[5]
For example, in Giacomodonato v PearTree Securities Inc., 2023, the Court found that two additional weeks of paid vacation, amounting to four weeks total, was sufficient fresh consideration for the new employment agreement. The Court highlighted that under Ontario’s Employment Standards Act (and the previous employment agreement), the employee was only entitled to two-weeks vacation. Accordingly, the additional two-weeks was held to be a “benefit flowing to the employee”.
Notably, the Court rejected the employee’s submission that the vacation time was a de minimus benefit, or of minor importance, finding it irrelevant that the employee did not himself place a high subjective value on this additional vacation time.
That said, the Court also rejected the employer’s submission that the “right to resign” before the end of the contract amounted to fresh consideration. The employer could not lead evidence to establish that it would have incurred costs, expenses or damages had the employee resigned early; therefore, the Court held that the “benefit of the “right to resign” is more imaginary than real.”
The Takeaway?
Traditionally, parties have been free to form their own judgment over the adequacy of consideration.
However, in the context of an amended employment agreement, the courts will scrutinize whether the changes actually and objectively benefitted the employee so as to amount to sufficient fresh consideration.
Before changing or accepting the terms of a pre-existing employment agreement, employers and employees are advised to seek legal guidance on the following questions:
- Has a new benefit been provided that was not previously contemplated in the original employment agreement?
- Does this benefit actually flow to the employee?
_________________
- Brant Securities Limited v. Goss, 2024 ONSC 915 at para 35.
- Humphrey v Mene, 2021 ONSC 2539, Braiden v La-Z-Boy Canada Limited, 2008 ONCA 464, Holland v Hostopia.com Inc., 2015 ONCA 762, 392 D.L.R. (4th) 650, and Hobbs v. TDI Canada Ltd. (2004), 2004 CanLII 44783 (ON CA), 246 D.L.R. (4th) 43 (C.A.).
- Kohler Canada Co. v. Porter, 2002 CanLII 49614 (ON SC) at para 31.
- Goberdhan v. Knights of Columbus, 2023 ONCA 327.
- Giacomodonato v PearTree Securities Inc., 2023 ONSC 3197at para 48; citing Lancia v. Park Dentistry, 2018 ONSC 751, at para 54; Riskie v. Sony of Canada Ltd., 2015 ONSC 5859 at paras 31 to 36; Clarke v. Insight Components (Canada) Inc., 2008 ONCA 837, 70 C.C.E.L. (3d) 13, at paras 7 to 11; United Rentals of Canada Inc. v. Brooks, 2016 ONSC 6854, at para 51.
Keira Zlahtic