A recent Ontario Superior court decision serves as a stark reminder to employers that using fixed term contracts can lead to costly damages awards- in this case one with a seven figure damages price tag.
In McGuinty v. 1845035 Ontario Inc., the employer, McGuinty Funeral Home, was faced with a breach of contract case from its former owner and now consultant/employee Grant McGuinty. As part of an agreement to sell the funeral home, the plaintiff entered into a ten (10) year fixed term "Transitional Services Agreement" that included a ten (10) year non-compete obligation. The agreement provided the plaintiff with an annual base salary of $100,000.00 and substantial commission opportunities. Unfortunately, the agreement did not include a termination provision in the event that the new owners decided to dismissal the plaintiff without cause or the contract was otherwise terminated through a constructive dismissal.
Less than a year after the sale of the funeral home, the relationship between the plaintiff and the new owners deteriorated. Without going into the messy details of that relationship breakdown, the Court determined that the actions of the new owners, taken cumulatively, resulted in the plaintiff's constructive dismissal and justified his departure from the funeral home.
As a result of the court's determination that a constructive dismissal had taken place, the plaintiff was awarded damages equal to what he would have received under the balance of the 10 year services agreement. Since the constructive dismissal had been triggered only at year 1, this meant nine years of base salary ($900,000.00), commissions (approximately $166,000.00), use of company vehicle ($108,000.00), group benefits valued at 10% of base income ($90,000.00) and golf membership ($9,000.00) for a total damages award of almost $1.3 million dollars. Without a termination provision or an obligation to mitigate set out in the contract, the plaintiff was entitled to this damages award even if he obtained alternate employment at any time during the nine year period left in the agreement.
While facts of this case are unique in that employers seldom enter into ten (10) year employment agreements, employers should nonetheless use fixed term contracts with caution. At CCPartners we regularly advise our clients that fixed term agreements do not provide any greater protection than a contract of an indefinite term. However, there are risks in using fixed term contracts. First, like the McGuinty case, a fixed term contract without a termination clause can increase an employer's liability should a decision be made to end the contract before the expiry of the fixed term. Second, where an employer uses a series of fixed term contracts, letting an agreement lapse/expiry even by a day before a new agreement is signed by an employee can revert the employment relationship back to one without the protection of termination clause and where common law reasonable notice applies.
The courts continue to hold employers to a very high standard in the interpretation and enforceability of employment agreements. Before asking an employee to sign any type of employment agreement, employers are well advised to seek legal advice from a trusted law firm that has an expertise in the drafting of employment agreements. The lawyers at CCPartners can assist with all questions related to the use of employment agreements as well as draft enforceable contracts for your workplace. Click HERE for our team members who can assist with your questions.
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