When is an employment or settlement agreement unconscionable?

The old adage “always read before you sign” is an important rule of thumb that applies to employment and contract law. However, even after a careful read of a contract, an employee may be pressured to agree to unfair terms and provisions in a settlement agreement.

 

Would an employee who signs such a contract be held liable for its terms and provisions? This article examines how a contract can be deemed unenforceable due to the legal doctrine of unconscionability.

 

What is an enforceable employment contract?

 

An employment agreement is essentially a contract that pertains specifically to an employment agreement. Commercial contracts tend to end on a given date or when all parties fulfill their obligations. Conversely, an employment contract may not stipulate an end date, as the nature of the relationship in most cases is ongoing and indefinite. 

 

The formation and enforceability of an employment agreement are dictated by the common law of contracts. The elements required to form an enforceable contract are as follows:

 

• Offer and acceptance
• Consideration
• Certainty of terms

 

In the employment context, an offer occurs after the recruitment process when an employee has presented with a job offer. Acceptance may occur when an employee verbally accepts the offer, signs a hiring package, or starts working. Consideration is fulfilled when there is an exchange of benefits between the parties. In an employment relationship, the consideration for an employer is the cost of paying an employee’s salary in exchange for their work performance. For an employee, their consideration may be the cost of spending hours at the workplace in exchange for wages or a salary.

 

Employment agreements may include basic terms such as the hourly rate of pay, but they can also contain complex provisions regarding employer liability, arbitration processes, and workplace policies. While employers may impose such provisions for their benefit, there must be a certainty of terms. When a contract lacks this element it may be deemed unenforceable. 

 

When is a contract unenforceable?

 

Even after it has been signed, an employment contract may be unenforceable due to any of the following issues:

 

• Ambiguity
• Mistake
• Unconscionability

 

When a provision is open to multiple reasonable interpretations, the provision or the whole contract may be unenforceable for ambiguity. An employment contract can also be unenforceable when a mistake has induced one or more of the parties into entering an agreement. Lastly, an employment contract can be deemed unenforceable when it is evident that an imbalance of power renders it unconscionable. 

 

What is an unconscionable contract?

 

When there is unconscionability within an employment contract or settlement release, the offending provision or the entire contract may be struck down as unenforceable. 

 

Unconscionability occurs when an employer uses an imbalance of bargaining power in their favor, and enters into an agreement with an employee on unfair terms. When a claim of unconscionability is alleged, a court often assumes that there is an imbalance of power between the employer and employee. Given the nature of an employment relationship, this assumption arises from the minimal bargaining power that employees have in negotiations. 

 

Unconscionability may be a common issue within provisions pertaining to:

 

• Compensation
• Termination Entitlements
• Arbitration of employment disputes 

 

An example of an unconscionable employment contract can be seen in the Supreme Court of Canada’s (“SCC”) decision in Uber Technologies Inc. v. Heller, 2020 SCC 16.

 

A class action was brought against Uber by their employees who worked as drivers. A provision within the employment contract stipulated that any arbitration between the employees and employer would take place in the jurisdiction of the Netherlands. The cost of applying for a claim through Dutch courts was estimated to be $14,500. 

 

The SCC decided that this provision was unconscionable because the high costs associated with seeking out arbitration were relied on by Uber to dissuade any claims made by employees. In drafting the employment contract, Uber used their unilateral bargaining power in their favor. 

 

Conclusion

 

Whether it is an employment contract or a release, employees may be pressured to accept a less-than-ideal offer. While signing a contract that is unconscionable is not determinative, employees should always exercise caution when signing a contract. 

 

If you are concerned that your employment contract or settlement agreement may be unconscionable and unenforceable, our team of experienced employment and human rights lawyers at Achkar Law can help. Contact us by phone toll-free at +1 (800) 771-7882 or email us at [email protected], and we will be happy to assist.

 

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