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Fixed-term Contracts: Not as Advertised

Many employers seem to think there is an advantage to having a fixed-term employment contract with an employee.  The usual rationales are that it sets the parties’ expectations for a period of employment and that either party can walk away at the end of the term, without any further obligation to the other.   These are reasonable rationales…when the employment relationship proceeds without difficulty to the end of the term.   However, where the employer wishes to terminate the employee’s employment prior to the end of the fixed term, significant liability can result if the term contract is not properly worded.

In the recent case of McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home), 2019 ONSC 4108, the new owners of a funeral home entered into a 10 year fixed-term contract with the prior owner of the funeral home.  There was no provision in the contract permitting either party to terminate the contract prior to the end of the term.  After about one year, the relationship broke down, certain terms of the contract were not respected by the new owner, and the employee claimed that he had been constructively dismissed.  The court, in agreeing with the employee’s claim and awarding over $1.2M in severance (being the amount of compensation owing to the employee for the remainder of the term), stated:

“In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed-term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation [Howard v. Benson Group Inc., 2016 ONCA 256 (CanLII), para. 44]. Accordingly, the Plaintiff is entitled to the compensation and benefits he would have received had the contract been honoured.”

While most fixed-term contracts are not for as lengthy a period as the one in McGuinty, the case brings into clear focus why there is little advantage for an employer to agree to a fixed-term contract.  An employer could fix the sort of problem that arose in McGuinty by inserting termination provisions in the contract allowing it to terminate prior to the end of the term – as the court said, by “stipulating a fixed term of notice”.   That being the case, an employer must ask itself “why not just stick to normal termination provisions and an indefinite term and avoid the risk of being held liable for an entire fixed term?  What is the additional value of an expiry date?”  If an employer places enforceable termination provisions in the contract at the commencement of employment, including notice provisions, the employer can terminate on those terms at any time.  If the object is to terminate after a certain amount of time (i.e. a deemed “expiry date”), the employer only has to provide the advance notice required by the contract to have the same effect as the expiry of a fixed-term contract.

Further, an employer must always be wary of the impact of exceeding the term of a fixed contract without renewing or otherwise providing a new fixed term of employment.  If the employer fails to provide a new term, then it is likely that the employment becomes one of indefinite duration subject to termination only on reasonable notice.  Once again, that being the case, an employer is better off having included termination provisions in the employment contract at the start of employment that will continue on indefinitely, rather than risk being subject to the implied term of reasonable notice if it forgets to renew or permits the employee to continue to work beyond the expiry date.

In addition, if the employer renews a fixed-term contract for multiple successive terms, the employer runs the risk of the contract being deemed “evergreen” and morphing into a contract only terminable on reasonable notice despite the presence of an expiry date.  Simply providing an indefinite term with termination provisions should eliminate this risk as well.

Finally, there is little advantage to the employer if the perceived value of a fixed term is that it will obligate the employee to remain employed for the term.   Except in extremely limited circumstances, an employer cannot force an employee to continue to work, despite the employee agreeing to a fixed term.  The only issue will be whether the employer can prove that it suffered a loss due to the employee’s decision to make an early departure.  Unlike an employer who will have to pay out the remainder of the contract in the event of early termination (and we note here that while fixed-term contract payouts in Ontario are not subject to mitigation, that is not the case in other provinces) there is typically little in the way of damages assessed against an employee who leaves early.   Rather than trying to gain an employee’s continued employment through a fixed-term contract, we recommend providing delayed compensation to incentivize the employee to remain, for example in the form of a retention bonus, payable if the employee stays employed for the desired period of time.

The upshot is that fixed-term contracts really are not as advertised.  They are fraught with downsides and provide very little upside that could not otherwise be achieved simply by inserting normal termination and retention provisions in an indefinite term contract.

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Lawson Lundell's Labour and Employment Law Blog provides updates on the most recent legal developments impacting the Canadian workplace and offers practical tips for employers. We cover a range of topics, including labour relations, employment law, collective bargaining, human rights, employment standards, employment equity, workers' compensation, business immigration, privacy, occupational health and safety and pensions and employee benefits. 

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