General context
With very few exceptions, for any contract to be binding, there must be consideration (a detriment to a party or benefit to the other) provided in exchange for a party’s agreement to do something. Once formed, a contract cannot be amended without new or “fresh” consideration.
The same is true for employment agreements. When an employer wishes to update an existing employment agreement, the employee must receive fresh consideration in exchange for agreeing to the new terms, such as a signing bonus or other benefit. Alternatively, an employer can terminate the existing employment agreement and enter into a new one. However, that requires providing proper notice of termination to the employee, which may be a lengthy period of time.
The question then is: what amount of consideration is sufficient to make an amended employment agreement binding on the employee?
The decision in Giacomodonato v PearTree Securities Inc.[1] (PearTree),released on June 3, 2024, provides guidance as to the extent a court will go to assess the existence of consideration in the employment context.
The trial decision
Mr. Donato sued his employer, PearTree, for wrongful dismissal. He won at trial, but the parties disputed how his damages should be calculated.
Mr. Donato had been working for another company when PearTree offered him a job. After negotiations, an employment agreement was signed. However, the parties re-engaged in negotiations thereafter when Mr. Donato indicated he would suffer financial consequences for leaving his current company. PearTree agreed to pay him CA$40,000 to offset those costs and a new agreement was formed, though it did not expressly reference the CA$40,000 payment.
Mr. Donato argued that his damages for wrongful dismissal should be calculated based on the first contract he signed, rather than the second. He argued he did not receive fresh consideration for executing the second contract.
Mr. Donato argued there was no consideration provided, as the new contract provided an overall disadvantage to him due to, among other items, its termination clause, expanded restrictive covenants and change in the variable compensation structure.
PearTree argued the new contract was overall more advantageous to Mr. Donato, including the CA$40,000 payment, additional paid vacation and a more favourable variable compensation structure.
The trial judge declined to engage in a comparative analysis of the advantages and disadvantages of the two contracts. While Justice Centa recognized that consideration is particularly important in the employment context due to the inequality of bargaining power, he also recognized:
“It is not role of the court to assess the adequacy of the consideration provided by PearTree or to assess whether or not the economic benefits obtained by Mr. Donato outweigh what he gave up.”
Justice Centa found that the CA$40,000 payment and additional paid vacation Mr. Donato would receive constituted fresh consideration. Justice Centa noted, however, that the variable compensation structure in the new agreement did not constitute additional consideration as the first contract did not clearly exclude oil and gas revenue from the variable payout, so there was no basis to find that this constituted a new benefit, as had been argued by PearTree.
The appeal decision
The Ontario Court of Appeal upheld Justice Centa’s findings and affirmed the trial judge’s statement that “courts are concerned with the existence, rather than the adequacy, of consideration.”
In its reasons, the Court of Appeal noted that no authority was presented by Mr. Donato to support his contention that the judge was required to “perform a comparative analysis of the overall advantages and disadvantages of the first and second contract in assessing whether there was fresh consideration for the latter.”
Significance
The PearTree decision is further confirmation that in providing fresh consideration, employers do not need to provide a benefit that cancels out, or exceeds, any detriment that will result to the employee from the new terms being agreed to.
In other words, it is not the quantum but the existence of consideration that is of concern to the courts. However of note, Justice Centa had observed in his reasons that “neither two additional weeks of paid vacation nor CA$40,000 can be fairly described as a mere peppercorn.” Does this mean a peppercorn (i.e., nominal consideration) would be insufficient to bind an employee to a new agreement? Not necessarily. To the contrary, in the 2018 Ontario Superior Court decision Lancia v Park Dentistry [2], Justice Andrew J. Goodman held that monetary consideration (in that case, CA$2,000) was sufficient fresh consideration even where the new terms would result in a net reduction to the employee’s overall compensation. In making this finding, Justice Goodman stated:
[54] While Park Dentistry readily concedes a reduction in Lancia’s net compensation, I agree that this was permissible by law and does not nullify the New Contract’s enforceability. Park Dentistry was not required to offset the reduction in compensation by providing monetary consideration of an equal amount. Indeed, it is trite law that courts will not inquire into the adequacy of consideration – a “peppercorn” will do. As long as there is consideration, contracts may be varied or superseded by new agreements. [emphasis added]
Takeaway
To safely update an employment agreement, a clear signing bonus that is expressly set out in the agreement remains the safest bet. While technically the amount of the consideration should not matter, employers should remain wary of providing a peppercorn as consideration where the new terms of the agreement will result in onerous conditions on the employee and where the employee is not alternatively being offered proper notice of the change. In addition, conditional consideration such as an incentive bonus which may not be earned or stock options which may not vest, are potentially problematic consideration on their own without a signing bonus. As always, it is still the law that unconscionable agreements or ones signed under duress will not be upheld.
For more information on this case or any questions related to the legal implications of this decision on your business, please contact the authors, Julia Dales or Catherine Coulter.
[1] 2024 ONCA 437 [PearTree].
[2] 2018 ONSC 751
