The Risk of Fixed Term Employment Contracts

Most employment relationships are indefinite, meaning that the parties will continue working together until one of them exits the relationship (such as resignation, termination or retirement).

An alternative to indefinite term employment is the fixed term contract. These contracts are often used when a company is looking to hire someone for a relatively short period of time, such as to cover a maternity leave, complete a specific project with a fixed end-date or for seasonal employment such as camp counsellors. In scenarios such as this, the employer may introduce a written agreement at the start of employment stating a specific date for the contract’s completion.

There are many benefits of fixed term contracts, most notably that if there is an understanding of the contract’s end date, there is no need to provide notice of termination or severance. However, as one recent decision from the Ontario Court of Appeal demonstrates, these contracts also come with their risks.

Howard v. Benson Group Inc., 2016 ONCA 256 

Mr. Howard was employed at an automotive service centre as the Sales Development Manager. His written employment contract was for a five-year term, commencing  in September 2012. His employer terminated Mr. Benson’s employment, without alleging cause, 23 months into the contract. He was 57 years old and earned $60,000 per year at the time of termination.

Mr. Howard brought an action for breach of contract, seeking payment of his compensation for the unexpired portion of the contract: more than three years’ salary.

The primary question raised on appeal is whether an employee who is employed under a fixed term employment contract is entitled to payment of the unexpired portion of the contract on early termination. In a unanimous decision, the Ontario Court of Appeal convincingly decided that the employee would be.

In Canadian common law (not to be confused with Employment Standards), there is a presumption that every employment contract includes an implied term that an employer must provide reasonable notice to an employee prior to the termination of employment. Absent an agreement to the contrary, an employee is entitled to damages as a result of the breach of that term (for more on calculating reasonable notice damages, view our previous post Terminated? Fired? Dismissed?: 7 Factors in Assessing Severance Pay).

However, where an employment agreement states unambiguously that the employment is for a fixed term, the employment relationship automatically terminates at the end of the term without any obligation on the employer to provide notice or payment in lieu of notice. Such a provision will oust the implied term that reasonable notice must be given for termination without cause.

Parties to a fixed term employment contract can provide for early termination and specify a fixed term of notice or payment in lieu. However, if the parties to a fixed term employment contract do not do this, the employee is entitled on early termination to the wages the employee would have received through to the end of the term.

Such was the case for Mr. Howard. After only two years of employment, he was awarded three years of wages to the end of his employment contract.

Takeaways

There is no question that in many circumstances, fixed term contracts have their uses. However, for companies looking to use fixed term contracts (and particularly contracts with a multiple year term, as was the case here), it is necessary to provide clear language that permits early termination.

Notably, the contract in the Benson Group case did provide for early termination, however it was viewed as too ambiguous to be enforceable. With this in mind, and recognizing the underlying risks associated with fixed term contracts, it is urged that employers seek legal advice and have a professionally drafted contract put in place when hiring employees to fixed-terms.

David M. Brown
Kent Employment Law
236-420-1946
david@kentemploymentlaw.com
LinkedIn: https://ca.linkedin.com/in/davidmjbrown
Twitter: @davidmjbrown

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