The employment agreement forms the backbone of any employment relationship; from casual to full-time, seasonal to shift-work, setting out the terms and conditions of employment at the beginning of the relationship is key to avoiding unknown liability at the other end, when termination is necessary. This is also true with fixed-term employment agreements.
A fixed-term employment agreement is one that specifies an end date to the employment of the individual, as compared to an indefinite employment agreement that has no end date. These are often used for backfilling leaves of absence or for staffing short-term projects, as well as having some other limited application. Some Canadian jurisdictions – Ontario, for instance – address the acceptable length of a regular fixed-term agreement in their respective pieces of employment legislation, but even that does not automatically absolve an employer of obligations at termination.
As a result, even where there is an end date set out in the fixed-term employment agreement, careful drafting of a termination provision is a must, as some employers have found out the hard way in the last few years. This is because the courts have determined that, absent an enforceable termination clause, if the employer chooses to end a fixed-term agreement early, they can be liable for payment equal to the remainder of the agreed-upon term, regardless of how long that might be. This was set out in the Ontario Court of Appeal's decision in Howard v. Benson Group Inc., in which the Court also held that damages under a fixed-term agreement should be treated as "liquidated damages or a contractual amount," meaning that (again, absent any contractual language to the contrary) the plaintiff had no duty to mitigate. Perhaps the most stunning example of that liability comes from the Ontario Superior Court's decision last fall in McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home),– stunning because in that case there were nine (9) years left on the agreement at the time of the breakdown in the relationship, putting the employer on the hook for more than one million dollars!
We call attention to this case now as many employers may be contemplating different arrangements for bringing their operations back up to speed during the ongoing transition phases of the current pandemic. This is not to say that fixed term employment agreements cannot be useful, but merely that one cannot assume that a fixed-term contract absolves the employer of any liability on termination (regardless of whether there statutory provisions governing fixed-term agreements).
Indeed, fixed-term employment contracts can be an effective way for employers to limit their obligations at termination, especially where the long-term needs of the business are not yet known. However, careful drafting is needed to avoid unintended liability. Accordingly, employers should strongly consider the following when contemplating entering into fixed-term agreements with potential employees:
- specify the period of notice to which the employee is entitled in case of early termination by the employer for any reason and ensure same complies with provincial employment standards requirements;
- expressly state that the employee will have a duty to mitigate in the event of early termination;
- clearly describe the employee's entitlement to compensation, benefits and any other privileges; and
- consider addressing what will happen if the term expires and the employee stays on indefinitely.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.