Working for a Peppercorn

How employers can change your contract mid-employment.

Does a contract have to be in writing to be binding? No. A handshake will do. (Actually, you don’t need a handshake either.) An oral agreement will be legally enforceable so long as you have a peppercorn.

“What-what-whaaaat?!” you’re asking. (First of all, calm down.) The peppercorn is symbolic of the legal concept of “consideration.”

Consideration

Here, “consideration” doesn’t mean careful thought. (The law will regularly enforce contracts the parties gave little thought.) Consideration is something of value exchanged for a promise. If there is no exchange of value, there is no contract. The law will not enforce a unilateral promise.

“I promise to paint your fence,” is not a contract. “I promise to paint your fence for 20 bucks” is a contract (assuming the fence-owner agrees to the deal).

Here is “Consideration” defined in a law dictionary from 1739. You know it’s old because the ‘S’s look like ‘F’s.

So, why the peppercorn? The law makes no inquiry into whether the deal is a good deal. It only needs to find some consideration. Traditionally, a party could bargain for nominal consideration described as “a peppercorn, if demanded” (e.g. see this 1861 lease from a case in the Court of Common Pleas of Upper Canada, where the first year’s rent was a peppercorn).

Today, binding agreements can still be made for “a consideration of one dollar” (see para. 20 of this 2014 Ontario Superior Court case).

Bored of this article? Take a short break with this entertaining story from physicist Richard Feynman about some fun he had with the concept of nominal, one-dollar consideration (at 5m02s).

Employment

An employer hires an employee to do work for pay. The consideration exchanged is labour for salary. That’s the employment contract. It doesn’t need to be in writing.

But what if an employer decides it’s a good idea to have a written contract (it is) only after the employee has already started working? The employer has a problem. Once a contract is formed, it is binding. The parties will be held to their bargain. One party cannot just unilaterally change the deal.

There must be new consideration for a change in contract to be effective. The mere continuation of employment will not be regarded as sufficient consideration to support a variation of an existing employment contract. The parties already bargained for the employee’s labour and cannot bargain for it again.

The Risks

An employer who presents an existing employee with a new written contract runs two main risks:

  1. the employee may respond by claiming “constructive dismissal:” essentially an allegation that the employer has breached the original employment contract; or
  2. the employee may carry on working under the new contract only for the employer to be surprised years later when a court refuses to enforce the contract for a lack of consideration.

An employer can avoid these outcomes by taking appropriate steps to implement the new contractual terms.

What to Do

A recent case from the Ontario Superior Court of Justice shows us how it’s done: Lancia v. Park Dentistry, 2018 ONSC 751 (CanLII).

Lancia was a 17-year dental hygienist working for Park Dentistry when new ownership took over the dental practice. New ownership wanted to implement written employment contracts for all of its staff, including Lancia who was employed pursuant to an unwritten agreement.

Working Notice to Avoid Constructive Dismissal

To avoid breaching Lancia’s existing contract, Park Dentistry had to end that agreement in accordance with its terms, (terms implied by law in the absence of express terms). Lancia was entitled to the legal presumption of “reasonable notice” of termination. As such, Park Dentistry gave Lancia 18 months’ advanced notice that her existing contract was ending. At the same time, Park Dentistry offered Lancia a new written contract.

This amount of notice allowed Park Dentistry to avoid a claim for “constructive dismissal.” Lancia could either accept, decline, or try to negotiate the terms of the new contract offered. But she could not allege the old contract had been breached.

Incentive to Sign Early

Park Dentistry also offered Lancia the option of signing the new contract early in exchange for a signing bonus of $2,000. Lancia signed the new contract within two days and took the signing bonus.

The New Contract is Enforceable

When a dispute arose later, Lancia took the position that the new contract was unenforceable because she had received no consideration for signing. She received a one-time signing bonus of $2,000, but the contract admittedly reduced her pay by more than $4,000 annually: a net loss.

Justice Goodman explained the court’s rejection of this argument by calling back to the peppercorn:

“Park Dentistry was not required to offset the reduction in compensation by providing monetary consideration of an equal amount. Indeed, it is trite law the 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. … If Lancia did not wish to accept the changes, she could have used the notice period to seek new employment. There was no rush to sign the New Contract. Lancia could have waited the 18 months prior to signing the contract.”

The Takeaways

An employer can implement new contractual terms by giving sufficient advanced notice ending the old contract.

An early signing bonus may incentivize an employee to accept the new contract sooner.

Employees should be careful not to give up rights for a mere peppercorn.

Here’s a gratuitous stock photo of peppercorn that didn’t fit anywhere else.