January 1, 2001 By: Janice B. Payne
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Introduction:

Hobbs v. TDI Canada, [2004] O.J. No. 4876 (C.A.) re-enforces the importance of consideration in employment agreements and the principle that an employer cannot unilaterally make significant changes to an employment contract.

Facts:

In December 1999, Alan Hobbs accepted employment with TDI Canada Ltd. as a salesperson in transit advertising. Hobbs had significant experience working in the Canadian market and was therefore able to negotiate appropriate commission rates for his services. When he received his offer, it was accompanied by a confidentiality agreement but did not specify commission rates. The letter of agreement set out Hobbs’ yearly draw and stated that “details on the rates, calculation and payment commission shall be provided to you in a separate contract.” Hobbs testified that he assumed this would simply confirm the commission rates he had orally agreed to during negotiations.

Not long after Hobbs began his employment, he received a Solicitor’s Agreement and was told that it was non-negotiable and must be signed if he was to get paid. Despite his misgivings of its onerous terms, Hobbs signed the agreement. The documents provided that commissions could be changed at the discretion of TDI, were only payable on amounts actually received, and would not be paid until Hobbs surpassed his annual draw. Furthermore, if Hobbs were terminated, he would only receive the commissions due as of the date of his termination and no commissions would be given for billings on accounts post-termination.

Five months later, Hobbs resigned from TDI to work for another company. To that date he had only received his car allowance, his vacation pay, and $24,423.07 for his monthly draws. The trial judge found that the contracts that Hobbs had sold would have generated total commissions of $153,321.62. Hobbs brought an action to recover the commissions he had not been paid for.

Trial Decision

Justice Jarvis of the Ontario Superior Court of Justice dismissed Hobbs’ claim on the grounds that the letter containing the offer of employment and the Solicitor’s Agreement together formed one employment contract. As such, no new consideration was required and Hobbs’ entitlements were restricted when he quit. Hobbs was found to have signed the agreement with full knowledge of its contents and implications. Justice Jarvis noted that Hobbs was “an experienced successful salesman with wide experience in the industry” and was “confident enough” to have succeeded at changing other restrictive terms of the non-competition provision during negotiations.

Justice Jarvis interpreted Techform Products v. Wolda, [2001] O.J. No. 3822 (C.A.) and the Court of Appeal’s reliance on the earlier Maguire v. Northland Drug Co., [1935] S.C.R. 412, to decide the case on the principle of where an “employee was required to sign an agreement allowing the terms of employment and found that the employer’s forbearance from dismissing the employee for a reasonable period of time after execution of the agreement,” this would constitute “adequate consideration for the employees signing of the agreement.”

Court of Appeal Decision

The Court of Appeal determined that Hobbs was entitled to the outstanding commissions. It held the trial judge erred in concluding that the offer letter and the Solicitor’s Agreement together constituted one contract of employment, thereby limiting Hobbs’ entitlement to commissions. The original letter set out the necessary terms of employment, save the commission rates, which had been agreed to orally. Nothing suggested that Hobbs would be required to sign any further agreement relating to his commissions. The Solicitor’s Agreement was inconsistent with the commission arrangement agreed to in the employment negotiations as it allowed the employer to cancel any outstanding commission payments. Further, the Solicitor’s Agreement was presented to Hobbs after he had begun working for TDI and was not necessary to complete an already valid contract.

The Solicitor’s Agreement was a new agreement and required consideration to be enforceable. The Court of Appeal distinguished the Techform and Maguire decisions from the case at hand by noting that in those cases the initial contracts had not provided for security of employment. When the employer later promised to forebear from exercising its right to terminate the employee for a reasonable period, the enhanced security of employment met the requirement for additional consideration.

The Court held that the applicable legal authority for this case was Francis v. Canadian Imperial Bank of Commerce (1994), 21 O.R. (3d) 75 (C.A.). This decision held that “the law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and then rely on the continued employment relationship as the consideration for the new terms.” Additional consideration is required to support any significant modification of the original terms of employment.

The Court added that requirement of consideration to support any modification or amendments to an employment agreement is especially important due to the inequality of bargaining power between employees and employers. After employment has begun, the employee loses the level of bargaining power held during negotiations.

Significance

Hobbs v. TDI Canada may be added to the recent jurisprudence acknowledging the vulnerability of the employee in an employment relationship. The employee is dependent on the remuneration provided by the employer and the security it provides. Without the protection of the law, many employees would be at a disadvantage if they tried to negotiate with an employer who unilaterally attempts to alter the terms of employment. The employer is therefore obligated to offer new consideration to the employee in exchange for changing the employment contract.

Consideration reflects the fact that two parties have exchanged something of value with each other, thereby creating a contract. An employer must provide new consideration to the employee if they wish to make significant alterations to an existing employment agreement. Offering continued employment will not be sufficient if this is something the employee already has. Increased job security may be new consideration if this was absent in the original employment agreement. Consideration must be something of benefit to the employee, such as new benefits, a raise, a bonus, or a promotion.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law