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Are (Nonunion) Employees Better Off Without a Written Employment Contract?

“Employees are better off without a written employment contract.”  Explain whether you agree or disagree with this statement drawing on the course materials.

I’ve asked the above question on an employment law exam.  What do you think?  Lawyers who work for employers usually advise their clients to always prepare a written contract and ensure that employees sign it before beginning work. That’s good advice for employers. But if it’s good advice to employers, does it follow that it is also in the interests of employees to have a written contract? It is the employer in almost every case that drafts the employment contract.  Employees usually just sign on the dotted line.  Should we expect that these contracts are designed to advance the employees’ interests?

What Happens When There is No Written Employment Contract?

I had a student recently who told me he’d been working at Yorkdale’s Victoria’s Secret for three weeks and still didn’t know what he was being paid. He hadn’t been

Are Employees Better Off Without a Written Employment Contract?

given a contract to sign, and no manager had told him his wage rate.  What happens when an employee begins working without a written contract?

The answer is that the employee is working in accordance with a non-written contract, a verbal or oral contract.  Every employee has a contract, but many employees do not have a written contract.  Issues can arise when the parties try to figure out the precise terms of the contract when nothing was written down.  Sometimes, there is a discussion before the employment begins in which the parties agree on certain conditions.  The employer says, “Start on Monday, and we’ll pay you $15 per hour.”  In that case, the contract terms consist of a wage rate of $15 per hour, and a bundle of other terms that are read into the contract by operation of statutes and the common law (see below).

This is what happened in Rejdak v. Fight Network. The employer made an offer to the employee in a telephone conversation that included certain terms, and when the employee accepted the offer, an enforceable verbal contract was formed.  The written contract given to the employee on his first day of work, which included terms beneficial to the employer not discussed in the earlier conversation, amounted to a proposal to amend the original verbal contract. It proved to be unenforceable for lack of new consideration flowing to the employee.

What Terms are Imported into a Non-Written Employment Contact?

The terms of a non-written employment contract can be ascertained by evidence of what was agreed verbally, or from what actually happens in practice.  The Victoria’s Secret employee will learn his wage rate when he receives his first paycheque and stub.  Sometimes, evidence of the terms of employment can be gleaned from other employees’ terms of employment.  For example, if every new employee is covered by the employer’s health plan, then that is strong evidence that the newest employee is also covered by that plan, even if that coverage wasn’t written down anywhere or even discussed.  So, in the Fight Network case just mentioned, the Court found that the written contract’s inclusion of health plan coverage for the employee did not amount to a new benefit for the employee beyond what he was already entitled to receive under his verbal contract.  The Court said that the employee, “would reasonably have expected to receive the health benefit plan since it was a standard benefit provided to all employees”.

When an employee begins work without a written contract, their contract includes whatever was agreed verbally, plus a bundle of other terms that are ‘read into’ the contract by law.  These come in two forms:  statutory terms and implied terms.

Statutory Terms: Employment standards legislation ‘reads into’ employment contracts a bundle of minimum contract terms.  So if an employee begins work and there has been no discussion of the wage rate, then she is entitled to at least the minimum wage.  The Victoria’s Secret employee might be surprised if his first pay stub shows he was paid more than the minimum wage, but if he is paid less than that, the employer will be in breach of the contract and the ESA.  Similarly, all of the rules about overtime pay, holidays, vacation pay, termination and severance pay, et cetera all form part of the contract.  An employee does not need a written contract to obtain the terms guaranteed in employment standards legislation.  They simply exist by operation of statute.

Common Law Terms: Courts ‘imply’ contract terms to fill the void left when the parties have not otherwise reached an explicit agreement on an issue.  Historically, these implied terms primarily benefited employers.  British courts implied all sorts of terms that required employees to act as loyal servants to the employer’s financial interests.  My favorite was the implied term discovered by Lord Denning in a case called ASLEF (no.2). Denning and the Court of Appeal found that employees who strictly obey their contract terms are in breach of the implied term in an employment contract that employees will not do anything to disrupt the employer’s economic interests, when the intent is to disrupt.  This is the origins of the modern rule making ‘work to rules’ unlawful.  Implied terms prohibit employees from competing against their employers, require employees to obey lawful orders, avoid lateness and intoxication, and generally be a good a loyal worker.  All of these implied terms favouring employers will be part of the contract, regardless of whether the contract is written or verbal.  No employer will ‘bargain’ them away in a written contract.

Some implied terms favour employees.  The most obvious is the implied term requiring the employer and employee to provide ‘reasonable notice’ of termination. Reasonable notice is almost always considerably greater than statutory minimum notice.  That is why it is in the interest of employers to have a written contract that supplants the implied notice term.  There are dozens of decided cases in which an employer is attempting to enforce a written notice term, and the employee is attempting to argue that the written notice term should not be enforced.  It is rare that an employee ever goes to court to enforce a written notice term, but Wronko v. Western Inventory was one.  That case was very unusual because the written contract gave the employee more than he would have been entitled to if common law ‘reasonable notice’ was applied.  That hardly ever happens.  Almost always, a written notice term is intended to limit the employer’s obligation to provide ‘reasonable notice’ by explicitly permitting the employer to give the employee less than ‘reasonable notice’.

True, the implied term requiring reasonable notice applies to employers too, so a written term that limits the amount of notice could theoretically benefit employees by allowing them to quit by providing less notice.  However, employers rarely sue employees for failure to give notice, since the damages caused by the breach are usually negligible.

True, a written contract might grant an employee a benefit above minimum standards and having that in writing might make it easier to enforce if the benefit is later denied.  But when a court case devolves into “she said, he said”, judges will often look at what happens with other similar employees when deciding what the parties most likely would have agreed to at the time the contract was entered into.  If the practice is to provide a benefit to employees, a judge is likely to read that benefit into a non-written contract, unless there is some reason why the parties likely did not intend that to be the case.  See the Redjak case, noted above.

True, some employees possess sufficient bargaining power to negotiate a written contract that is beneficial to their interests as well as the employees.  But that is not true of most workers.  Most workers just sign whatever contract is placed in front of them.  Those contracts are written by the employer or the employer’s lawyers, who are paid to protect the employer’s interests.

Question for Discussion:

I’m not suggesting that employers (or their lawyers) are out to screw their employees.  However,  the employer’s job is not to bargain the best possible contract for the employee.  My question for employment law students is a basic one:

Can you make an argument that employees are better off with written employment contract than if they just start working without a written contract?







5 Responses to Are (Nonunion) Employees Better Off Without a Written Employment Contract?

  1. Porter Heffernan Reply

    February 4, 2013 at 1:56 pm

    The answer depends on the nature of the individual contract. Product of negotiation? Reasonable terms offered by a fair employer? Or a form contract solely to protect the employer?

    Of course in the case of some employees (senior executives for example), the contract often records the results of a complex negotiation. It may well contain terms better than the common law, and it will address issues on which the common law is simply silent. The obvious answer – a written contract is a practical necessity for both parties in those cases.

    But a written contract still has value for many other employees, even apart from those few.

    Looking at whether the employee would receive more on termination with or without a contract is only one side of the equation. The other is how much it costs them to collect. Even a simple notice case can cost tens of thousands of dollars. Perhaps half of that can be recovered in court costs.

    While the executive may have the resources and the stamina to litigate over her entitlements, the average middle manager probably often does not. The contract provides certainty. It is clear (absent the usual vitiating or complicating factors) to both parties what payments will arise on a without cause termination. It is clear what obligations the employee will have after termination. The contract reduces the need for litigation, reducing legal fees, stress, and delay for the employee in obtaining her entitlements upon termination.

    Even during the life of the contract, certainty is valuable. A good contract clearly sets out the employer’s expectations and the employee’s rights. It reduces the risk of disputes or disagreements arising from misunderstanding over these terms under a verbal contract. Many times these disputes are the seeds of the eventual termination. A fair and reasonable contract may do much to promote a positive, long lasting employment relationship.

    What about the bare-minimum form contract? Those contracts most often arise in relatively low-skill jobs, where there is significant employee competition for limited positions. The reality is that most employees in those cases do not have the option of simply starting work without a contract. The employer will not accept them unless they sign, and they have little bargaining power to change the terms of the contract (although I have seen it happen).

    The best I can offer in these cases is that employees who sign are hired. They are better off than employees who were not offered the job.

    • Doorey Reply

      February 4, 2013 at 2:45 pm

      Thanks Porter. Your analysis assumes that if a contract is in writing, both sides will abide by it and therefore there will be no need for litigation. If the employer violates the written contract, then the written contract must still be enforced through the expensive legal proceeding you reference. Many employment contracts I see don’t set out job expectations and descriptions of the sort you are talking about, so the ‘certainty’ argument wouldn’t apply. They are brief, only a page or two, and include language limiting the notice period, something about vacations, a probation period, a promise to review the employees’ performance, and granting employers a vague authority to assign work. I wonder how much certainty these contracts add beyond what an employee would just tell an employee verbally in any event. You remind me of another point though: courts are unlikely to imply restrictive covenants against employees after employment ends, so employers usually have to include those clauses in the written contract, another reason why employees may be better off without a written contract.

      But I don’t disagree with your main point, which is that employees may be better off with a written contract that provides them with less (sometimes considerably less) than they’d be entitled to if there was no written contract, assuming the employer complies with the written terms, because most employees can’t afford to enforce an employment contract. This is really the point I want students to grasp. The cost of enforcing employment contracts completely changes the dynamics of what constitutes a fair and reasonable contract because one party is so much better equipped to absorb those costs.

  2. Dennis Buchanan Reply

    February 6, 2013 at 12:18 am

    Most written contracts do seek to limit an employee’s entitlements. I agree that certainty can be valuable (though less so for an employee with an ESA-only contracts), but it’s relatively rare to see a written contract promising notice which is greater than the most conservative estimate of the reasonable notice period. And where there isn’t a written contract, it isn’t usually too difficult (read: too expensive) to get an employer up to that conservative estimate. (Sometimes, you need to issue a statement of claim to get them to hire a lawyer who will knock some sense into them. But it really is quite rare that you have to go too far in a proceeding where the reasonable notice period is, say, 8 to 10 months, and the employer won’t move a penny above 4 months. Unless there’s an issue of just cause or – ironically – the enforceability of an employment contract.) So I think I would disagree that there’s any significant number of employees for whom the certainty of a contractual termination clause is more beneficial than an entitlement to reasonable notice.

    Still, context counts for a lot. Some employees do have bargaining power.

    Drafting counts, too.

    Consider Bowes v. Goss Power Products Ltd., where Mr. Bowes’ successful mitigation resulted in a significant windfall because of his employment contract, where his wrongful dismissal damages at common law would have been essentially non-existent.

    Or consider Loyst v. Chatten’s Better Hearing Service, where the fixed term contract resulted in the equivalent of a 30 month notice period, for an office manager with six years of service.

  3. Sean Bawden Reply

    February 6, 2013 at 11:05 pm

    Dennis’ point about Bowes v. Goss Power is a good one. Any agreement that provides for a reasonable, fixed amount of severance (not uncommon in executive agreements) can be better for employees if they can dodge the obligation to pay back mitigation income.

    Also, if there is an agreement to continue health/dental benefits for a period of time that too can be of benefit. While one may be able to sue for benefits on a retroactive basis (Brito v. Canac), a lot can happen while waiting for judgment and it may be too late.

  4. Porter Heffernan Reply

    February 7, 2013 at 10:10 am

    Regarding Dennis’ comments – I’ve certainly had files where it has been very difficult for opposing counsel to get my clients up to a “conservative” estimate of a reasonable notice period. A lot depends on the client’s perception of what is reasonable – their expectations as to what they will have to pay upon termination.

    The contract manages the employer’s expectations too. I haven’t had many clients come to me and say “we don’t want to pay what we agreed to.” Apart from just cause cases of course. In a straightforward termination, no bad faith, no just cause, both parties have an expectation of what will be paid where the contract is clear.

    You also can’t understate the psychological impact of litigation, whether or not it goes all the way to a trial. I suspect many people would take a discount on what they might be able to obtain in court in order to walk away from their employment on good terms, with immediate payment, and with no need to involve a lawyer.

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