Can an Employer Change an Employment Contract to Require Arbitration?

Written on behalf of Peter McSherry
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Many employees may not give much thought to certain terms in their employment contracts when entering into a new employment relationship. However, each contract provision can significantly impact an employee’s rights and obligations throughout their employment, which is why it is important to ensure that both parties understand the potential consequences of signing the agreement presented to them.

The Court of Appeal for Ontario recently heard a case in which the employer attempted to unilaterally alter the employment contract terms. Leading up to the dispute at hand, an insurance agent who was working for a fraternal benefit society sought to recover payment in lieu of notice when he was terminated from his role, however, the employer claimed that the employee was barred from doing so and must instead enter into arbitration pursuant to the employment agreement.

Insurance salesperson offers insurance to organization’s membership

In the case of Goberdhan v. Knights of Columbus, the appellant in the decision was the fraternal organization known as the Knights of Columbus while the applicant employee was a field agent who sold insurance throughout the Knights of Columbus organization.

The parties signed several contracts, with the first one coming into effect in April 2011, when the employee first started working for the Knights of Columbus. Two other contracts were signed in October 2018 and April 2019.

The employee’s field agency was terminated approximately one month after the most recent contract was signed. Following his termination, the employee sued the Knights of Columbus for wrongful dismissal on the basis that he was an employee of the Knights. The Knights of Columbus, conversely, sought an order to stay the application, relying on a mandatory arbitration clause from the October 2018 and April 2019 contracts.

Motion judge finds arbitration clauses to have no force

The motion judge held that the employee was in fact an employee of the Knights of Columbus, and not an independent contractor. Further, while the October and April contracts were signed by the parties and contained mandatory arbitration clauses, the clause was not included in the initial April 2011 contract, and no consideration was given to the employee in return for adding these clauses.

In employment law, if an employer seeks to alter the terms of an employment contract which are in favour of the employer, the employee must receive something in return. For example, if an original contract called for six months’ payment in lieu of notice, the employer cannot unilaterally introduce a new contract which only provides for two months’ payment without providing some benefit to the employee.

In applying this principle to the case at hand, the motion judge found that the arbitration clause favoured the employer, and absent consideration given to the employee, the arbitration clause would not be considered valid.

Arbitration Act cannot be relied on if arbitration agreement is found to be invalid

In its appeal, the Knights of Columbus relied on the Arbitration Act, which states that “there is no appeal from the court’s decision” on a motion to stay brought under the Arbitration Act. However, the Court noted that the Arbitration Act cannot be relied on once the motion judge determined that the arbitration agreement was invalid.

A previous decision from the Court of Appeal of Ontario in Huras v. Primerica Financial Services Ltd., found that when a court finds there is no arbitration clause in effect, the Arbitration Act has no application. The decision, which dates back 23 years, was recently upheld up at the same level of court in Toronto Standard Condominium Corporation No. 1628 v. Toronto Standard Condominium Corporation No. 1636, in which a motion judge concluded there had been no consideration given for two contracts containing arbitration clauses; therefore, the employer was not able to rely on the Arbitration Act to prevent disputes from proceeding to court.

Should the motion judge have ordered a stay in the action?

The Knights of Columbus’ other ground of appeal was that the motion judge erred when he refused to stay the action. They claimed that the motion judge should have granted a stay so long as it was “arguable” that the decision should have been put before arbitration and that an arbitrator should make a final determination.

The Knights of Columbus relied on the decision of Peace River Hydro Partners v. Petrowest Corp., in which the Supreme Court of Canada established a two-step test that courts must follow before determining whether a dispute should proceed to arbitration. The Court summarized a portion of this decision, writing that:

“a stay application should only be dismissed on the basis of a statutory exception in a ‘clear case’, ‘for example, one in which the party seeking to avoid arbitration has established on a balance of probabilities that the arbitration agreement is void, inoperative or incapable of being performed. Where the invalidity or unenforceability of the arbitration agreement is not clear (but merely arguable), the matter should be resolved by the arbitrator.’”

Court finds that arbitration clauses are invalid

Instead of favouring the appellants’ argument, the Court found the facts before it established a clear case where the motion judge determined that, absent fresh consideration, the arbitration clauses in the contract could not be enforced.

The Knights of Columbus also took the position that the motion judge erred in concluding that the contracts were void of fresh consideration on the grounds that they failed to establish that there had been consideration. However, the Court found that the employer’s failure to establish consideration was not the only reason the motion judge arrived at that decision. In addition to a lack of evidence, the employee had also submitted an affidavit stating that his contract had been modified without consideration and that he had no choice other than to sign it if he wanted to stay in his role.

The Court agreed with the motion judge that no consideration was given to the employee and the arbitration clauses were invalid.

Peter A. McSherry Employment Lawyer in Guelph Helps Employers and Employees Navigate Employment Agreement Disputes

At Peter A. McSherry Employment Lawyer, our employment law team recognizes that no two situations are the same, so we work closely with clients to understand their circumstances and provide them with a personalized assessment of their case. We represent parties in a wide range of employment law matters, including employment contracts, wrongful dismissal and severance packages. To schedule a confidential consultation regarding your employment contract dispute, contact us by phone at 519-821-5465 or online.