Termination clause sent after worker accepted offer needed fresh consideration to be valid
An employment contract with a termination clause sent to a worker the day after he accepted an employment offer isn’t valid without fresh consideration, a British Columbia court has ruled.
In April 2021, the worker, now 42 years old, exchanged emails with HungryPanda Tech, an international company operating an online food delivery platform, about a position with the company. The company sent the worker an employment offer for the position of “general manager of Canada” on April 23, outlining the principal terms of employment including salary, length of the work week, a three-month probationary period, and stock options of $20,000, along with a clause stating that the offer was conditional on the worker providing documents proving he could legally work in Canada.
The email concluded with the statement: “After your confirmation we will provide you with an official employment agreement for your signature.”
The worker asked if there was any room to increase the stock options. HungryPanda sent a revised offer the next day, adding another $30,000 of stock options upon successful completion of the probationary period.
The worker accepted the job offer the same day and, one day later, on April 25, HungryPanda sent him an official employment agreement. The new agreement included a termination clause that allowed the company to terminate the worker’s employment at any time by providing “termination and severance entitlements as prescribed by applicable employment standards, that being at the present time, the Act respecting labour standards (ESA), together with any other statutorily prescribed entitlements and benefits, which includes the continuation of the employee’s group benefits (if applicable) throughout the reasonable notice period prescribed by the ESA.”
The employment agreement also included a clause stating that the agreement would supersede any pre-existing employment agreements between them and any obligations from a pre-existing agreement would be void.
“It’s actually a good practice to articulate that a new version of the contract replaces any pre-existing terms agreed to, because you don't want an unanticipated legacy of the first contract manifesting itself sometime down the road,” says Michael Penner, a labour and employment lawyer for Levitt LLP based in Victoria. “But the flaw was that, in order for it to be operational, the new contract needed to have some fresh consideration to make it valid.”
Worker signed new employment agreement
Both the worker and HungryPanda signed the employment agreement the day it was sent, April 25. The worker started working on May 3.
The worker worked for HungryPanda for about 18 months until Oct. 11, 2022, when the company terminated his employment with an effective termination date of Oct. 25. The worker sued for wrongful dismissal, claiming common law reasonable notice of eight months and arguing that the termination clause was unenforceable. The worker said the employment agreement modified an already existing employment agreement established in the initial offer that he accepted, and he received no new consideration for signing the second agreement. He also argued that the termination clause was drafted in a way that would allow HungryPanda to terminate his employment without cause with notice lower than the statutory minimums.
HungryPanda countered that it was clear that the initial offer wasn’t the employment agreement and it had stated that it would provide the official employment agreement for his signature once he accepted the offer. It also argued that, if the initial offer was a binding agreement, then the subsequent agreement provided fresh consideration by providing entitlement to group health benefits described in the company’s “employment booklets, manuals, and policy documents” along with an expense account and paid time off.
The court commented initially that the employment agreement wasn’t well drafted, as the references to employment standards legislation were variable and didn’t specifically point to the BC Employment Standards Act (ESA). In addition, there were misnumbered clauses, typographical errors, and a couple of duplicate provisions.
Job offer, acceptance constituted binding agreement
The court found that the reference in the original employment offer that it was conditional on the worker providing proof of his legal right to work in Canada “strongly suggests the offer was not conditional in other respects,” particularly since the employment agreement sent later didn’t have conditional language. In addition, the offer that the worker accepted contained “all of the elements necessary to form an employment contract,” such as job title, place of employment, start date, salary, pay periods, stock options, and the probationary term. The terms that were absent, such as vacation entitlement and notice period in case of dismissal, were covered by legislation or common law, the court said in finding that a reasonable person would conclude that the first offer constituted a contract and the subsequent official employment agreement just documented the terms.
“There was enough information in the [initial] email exchange that it covered off all of the fundamental elements of an employment contract and, with the worker responding with an affirmative, did the contract crystallize?” says Penner. “The court said yes, it happened, and there was no contingent language from the employer saying, ‘This contract only comes into being once you have signed the actual employment contract,’ so the court found that there was an active operating contract at the outset that didn’t contain a termination clause - and in the absence of that termination clause, this worker is entitled to reasonable notice of termination.”
A contract is formed when there's an offer by one party that’s accepted by the other with the intention of creating a legal relationship and supported by consideration, adds Penner.
“And then they look at the party's conduct in the exchange of contractual terms, and would a reasonable person conclude that there was some sort of offer that was accepted - the dialog in those emails made it very clear that HungryPanda was hiring this guy into a specific position to do a very specific thing for a very specific amount of money, and the worker accepted,” he says.
The court agreed with the worker that no fresh consideration was provided by HungryPanda for the signing of the new employment agreement. The court noted that provisions such as an expense account and paid time off were already legally required under the ESA, and health benefits were too vaguely outlined in the agreement to be considered fresh consideration.
Fresh consideration for new contract
“The employer has to prove that it offered something of value and it couldn’t show the court that, absent the worker signing this contract, he wouldn't have gotten the group benefits anyways,” says Penner. “The terms that they added in the contract [such as the termination clause] all operated adversely towards the worker in favour of the employer, so [HungryPanda] had to show that it offered something of greater value than in the original contract that would allow it to replace the original, and it just never got there.”
“[HungryPanda] tried to paint the reimbursement of business expenses as an expense account [that could serve as fresh consideration], but the court just didn't buy it - an obligation of the employer to reimburse out-of-pocket business expenses doesn't equal an expense account,” he adds.
The court also considered the appropriate notice period for the worker, who sought eight months' notice due to his senior management role with Mandarin as a primary language and limited employment prospects. While acknowledging the worker’s management responsibilities, the court determined that six months was appropriate, taking into account a non-competition clause in the employment agreement and the seven months it took the worker to secure new employment.
After deductions for two weeks of working notice and the worker’s earnings during the notice period, HungryPanda was ordered to pay the worker $64,526.71.
“Often, employment situations arise organically and time can be of the essence in locking a potential employee into a deal, but it’s vital for employers to take the time to make sure the paper reflects what's in your head,” says Penner. “If you’re making an offer to an employee, it’s a best practice is to use both a letter and a contract - the letter can help amplify what's in the contract, but it will make it patently clear to the employee that the contract document itself is what ultimately will govern the relationship between the employer and the employee.”
It's also important for employers to ensure that they’re using the pertinent jurisdiction’s laws and rules and referencing them appropriately when drafting employment contracts, adds Penner.
“Using generic terms, particularly when you're referencing legislation, will get you into a whole boatload of problems,” he says. “I'm sure there are many compelling reasons why you want to get somebody locked in and working right away, but just taking that time to ensure that your contract is well-drafted, you'll never regret taking that moment.”
