A signed employment contract is one of the most important legal documents a Canadian small business can have. Without one, disputes about termination pay, confidentiality, or compensation are resolved by courts applying common law, which can be far more expensive than what the Employment Standards Act alone would require. This guide covers the basics every Ontario SMB owner needs to understand before hiring.
Fixed-term vs indefinite-term contracts
The most fundamental choice in an employment contract is whether the relationship has a defined end date (fixed-term) or continues indefinitely until one party ends it (indefinite-term). The legal implications are meaningfully different.
A fixed-term contract runs from a specified start date to a specified end date. When the term expires, neither party owes the other notice or termination pay, the contract simply ends. This is useful for project-based hires, maternity leave replacements, or seasonal roles. The risk: if you terminate a fixed-term employee before the end date without just cause, courts have typically awarded the remainder of the contract as damages, even if that is twelve months of pay. Fixed-term contracts therefore require careful drafting of an early termination clause.
An indefinite-term contract has no end date. The employment continues until either party provides proper notice. When you terminate an indefinite-term employee without just cause, you owe them notice or pay in lieu under the Employment Standards Act (ESA) at minimum, and potentially significantly more under common law if your contract does not cap the entitlement. This is the default for most full-time Canadian hires.
A critical pitfall: employers sometimes use fixed-term contracts for roles that are functionally indefinite (same role, renewed each year). Ontario courts have found that repeatedly renewing fixed-term contracts can convert them into indefinite-term employment, stripping away the benefit of the fixed-term framing entirely.
What every employment contract must include
At minimum, a Canadian employment contract should clearly state: the job title and a general description of duties, the compensation (salary or hourly rate, pay period, bonus structure if any), regular working hours and any expectations around overtime, the start date, and who the employee reports to.
These basics seem obvious, but disputes frequently arise from vague or missing terms. "Competitive salary" is not a salary. "Some overtime may be required" is not an overtime policy. Being specific in the contract is what gives you enforceable terms rather than interpretations that favour the employee.
In Ontario, any term in an employment contract that provides less than the minimum entitlements under the Employment Standards Act is void, the ESA floor always applies. You can offer more than the ESA minimum, but you cannot contract below it.
Drafting a termination clause that actually protects you
The termination clause is the most legally significant part of most employment contracts for Canadian small businesses. Without one, common law notice periods apply on top of the ESA. Common law notice for a mid-level employee with five years of service can be six to twelve months, a significant liability that a well-drafted clause can cap.
A defensible termination clause for Ontario employers typically looks like this: "The Employer may terminate the Employee's employment without cause by providing notice or pay in lieu of notice equal to the greater of (a) the minimum notice required by the Employment Standards Act, 2000, or (b) [X] weeks of base salary per completed year of service, to a maximum of [Y] weeks."
The Ontario Court of Appeal has struck down termination clauses that fail to reference ESA minimums explicitly, or that could theoretically be applied in a way that violates the ESA even if not intended to. Poorly drafted clauses often become void, leaving the employer exposed to full common law notice. Have any termination clause reviewed by an employment lawyer before using it, the cost of one legal review is far less than defending a wrongful dismissal claim.
Also include a just cause clause: "The Employer may terminate the Employee's employment for just cause at any time without notice or pay in lieu of notice, to the extent permitted by applicable law." Note that the bar for "just cause" dismissal in Canada is high, a single incident is rarely sufficient. For a detailed look at what constitutes just cause in Ontario, see our guide on Ontario Employment Standards for small businesses.
Confidentiality clauses and what verbal offers cannot protect
A confidentiality clause (also called a non-disclosure clause) restricts the employee from sharing the employer's proprietary information, client lists, pricing, trade secrets, supplier relationships, during and after employment. These clauses are generally enforceable in Ontario when they are specific about what is confidential and reasonable in scope.
Non-solicitation clauses (restricting an employee from poaching clients or colleagues after leaving) are more nuanced and should specify a geographic area and time period to be enforceable. Non-compete clauses, which prevent an employee from working for a competitor at all, are generally not enforceable in Ontario for most workers under amendments to the ESA since 2022 (executive-level employees are a narrower exception).
A verbal offer letter or verbal employment agreement cannot protect you from most of these risks. A candidate who accepts a verbal offer and then disputes their termination entitlements will be assessed under common law because there is no signed contract to reference. Get the signature before the start date, never after, as Ontario courts have found that contracts signed after employment begins may lack fresh consideration and be unenforceable.
Getting signatures before the start date
The rule in Ontario employment law is clear: an employment contract signed after work has already begun may be unenforceable because the employment relationship already existed and no new consideration was provided for the contract terms. This means a termination clause in a contract signed on day one of employment may be voided by a court.
The safe practice: send the offer letter and contract at least three to five business days before the start date. Make signing a condition of commencing employment, not a formality on the first day. If a candidate needs time to review it (which is reasonable for a complex contract), grant that time, but do not let work begin before the signature is on file.
For your first hires, using a lawyer-reviewed template contract and adapting it for each new hire is far cheaper than custom-drafting from scratch each time. Budget for a proper employment lawyer review once and then use that reviewed template as your baseline going forward. For more on the financial implications of hiring decisions, see our companion guide on what employee turnover costs Canadian SMBs.
Frequently asked questions
Do Canadian small businesses need written employment contracts?
Not legally required, but strongly recommended. Without a written contract, disputes are resolved under common law, which can result in termination notice awards of six to twelve months or more for long-tenured employees. A signed contract with a properly drafted termination clause caps this exposure significantly.
What is the difference between ESA minimum notice and common law notice in Ontario?
The Ontario Employment Standards Act sets minimum notice based on tenure: one week per year of service up to eight weeks. Common law notice, what courts award when there is no enforceable termination clause, can be much higher, often two to four weeks per year of service. The gap is where most wrongful dismissal claims originate.
Can I include a probationary period in an employment contract?
Yes. Ontario's ESA provides that employees dismissed during a probationary period of up to three months are not entitled to termination notice. Beyond three months, ESA minimums apply regardless of what the contract says about probation. Having a probationary clause in your contract formalizes this expectation for the employee.
Is a non-compete clause enforceable in Ontario?
Generally no for most employees, since Ontario amended the Employment Standards Act in 2022 to make non-competition agreements unenforceable for the vast majority of employees. The exception is executives and certain senior roles where a narrow non-compete may still be enforced. Non-solicitation clauses (targeting clients or colleagues) remain enforceable when drafted reasonably.
What happens if I made a verbal job offer and the employee accepted, do I still need a written contract?
Yes. A verbal offer of employment creates a contract, but only for the terms you stated verbally. Everything not discussed, termination entitlements, confidentiality, hours flexibility, defaults to common law or the ESA. Having the employee sign a written contract before starting (not after) gives you enforceable terms on those unstated items.