The contractual force of employment policies (Toughest HR Question)

Question: Do employment policies have contractual force?

Answer: Particularly in a non-union context, an employer generally has a much easier time enforcing the terms of an employment policy if it is found to have contractual force — that is, the policy has been incorporated into the employment contract.

While every employee has an employment contract, some are written, some are verbal and many are a combination of the two. Others may consist of one or more documents in addition to a basic employment offer letter. The question is whether or not extraneous documents such as an employee handbook form part of the contract of employment.

It is doubtful that simply providing employees with a copy of an employee handbook would be sufficient to give it contractual force. Having an employee sign a statement that she received the handbook and agrees to the terms and conditions spelled out in the document is a good start, but is still unlikely to give the policies contractual force.

Specifically incorporating the handbook into the employee’s contract by stating right in the written agreement that the employee handbook forms part of the contract and providing the employee with a copy of the employee handbook at the time of hire is one way of ensuring the handbook has contractual force.

Including a statement right in the handbook that the policies form part of an employee’s contract of employment can also help. However, that is probably insufficient on its own to give the policies contractual validity (and could be ineffective or even lead to constructive dismissal claims).

While giving policies contractual force certainly makes it easier for employers to enforce policies from a disciplinary perspective, the drawback is it becomes more difficult for employers to make changes to policies in the future without amounting to constructive dismissal.

While employers probably retain discretion to make minor policy changes from time to time — and while constructive dismissal only arises out of unilateral changes to a fundamental term of an employee’s contract — some policy changes could easily be argued to be fundamental in nature.

There are some ways around this, including having a clause in employees’ written contracts to the effect that the organization reserves the right to make changes to employment policies at their sole discretion. While such a statement (especially at the time of hire) is likely to be effective, simply including the statement in a handbook is a good practice but is unlikely to be effective in avoiding constructive dismissal on its own.

Another option is to provide long-advance written notice, of perhaps two years or more, of an impending major change to an employment policy. However, employers should exercise caution when using this approach, particularly if one or more employees object to the changes. In such a case, it would make sense to provide the employee with written notice of termination along with a new contract to take effect on the day the reasonable notice period expires.

The 1984 British Columbia Supreme Court case of Rahemtulla v. Vanfed Credit Union dealt with the contractual force of a policy manual (although this decision was not followed in subsequent cases for other reasons). The judge commented that if the contents of the handbook were to be binding, the document would need to have contractual force. In order for that to apply, there would need to be: a concluded agreement, consideration (something of value) and contractual intention. With regard to a concluded agreement, the judge said the parties had not “expressed a common intention to be bound by the terms of the policy manual” by way of a signature or implied assent.

In terms of the need for additional consideration, the simple continuation of employment by the defendant did not constitute valid consideration (although additional consideration would not have been required if the handbook was presented to the employee prior to entering into the contract on the first day of employment). While the general law of contract requires an exchange of “consideration,” the value does not have to be very high. 

In the case of a contractual change, additional or “fresh” consideration should be provided to an employee in order to make the change valid. Examples might include a small bonus, a minor bump in salary or a slightly enhanced benefits package (but clearly the mere continuation of employment wouldn’t count as additional consideration).

Finally, the question of whether the parties intended to enter into a legally binding agreement was answered by the “tone” of the manual, which was “informational” at best. The manual only covered certain aspects of the organization’s history, policies, working conditions and employee benefits. It was not meant to be comprehensive and was only given to the employee with some vague instruction to read it.

In the 2010 case of Nishina v. Azuma Foods (Canada) Co., the B.C. supreme court again had an opportunity to examine the contractual force of an employee handbook. Citing Rahemtulla, the court determined there was no evidence the handbook in question was familiar to the employee, even though she had been with her employer for over four years and signed an acknowledgement she had received the handbook.

In spite of the fact that a handbook may be found not to have contractual force, it is still important to have such a document (although it may be more difficult to rely on the handbook to uphold just cause for termination). In all cases, it is a good idea to ensure employees read and understand the contents of the handbook and sign a letter to that effect and that they agree to be bound by the handbook. 

It is also advisable for employers to obtain legal advice from an employment lawyer before making major changes to an existing employee handbook — particularly if the organization would like the document to have contractual force.