Canada: Avoid the Potential Pitfalls of ‘Fixed-Term’ Employment Contracts

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On October 13, 2016, the Supreme Court of Canada denied leave to appeal an Ontario Court of Appeal decision which ordered an employer to pay a former employee 37 months of salary and benefits following termination (without cause) – after only 23 months into the contract of employment.

In this case, the employee in question had a written contract with a ‘5-year term’. The employer terminated the employee just 23 months into the contract, without alleging cause. The employer’s right to early termination without cause was governed by the following provision:

Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.

The employer paid the employee two weeks’ salary in lieu of notice and took the position that it had satisfied the contract. The motion judge, however, found that the without cause termination provision was unenforceable because of ambiguity. That finding was not appealed.

When the termination without cause provision was held to be unenforceable, the employer argued that the common-law presumption of reasonable notice of termination should apply.

The Court of Appeal disagreed with this thinking and held that when the employer terminated a fixed term employment contract, without cause, and there was no enforceable provision for early termination without cause in the contract, the employee was entitled to the compensation he would have received to the end of the employment contract. As a result, the employee was entitled to 37 months of salary and benefits.

In addition, the Court found that the employee had no duty to mitigate his damages. Consequently, even if the employee found new employment the day following the termination, he would still be entitled to the 37 months of compensation from his former employer.

This case serves as an important reminder of the necessity for clearly written employment contracts as a whole, and the termination provisions therein explicitly.

The key takeaways for employers are:

  • Fully consider whether or not a fixed term contract is appropriate in the circumstances of the specific job and employee at issue. If it is anticipated that the employee may not complete the full term of the contract, either because of availability of work, or the circumstances of the employee, a contract of indefinite duration may be preferable so as to avoid this additional exposure. In most cases, with properly worded termination provisions, there is no need for a fixed term agreement.
  • A termination without cause provision that clearly refers to the applicable employment standards minimum notice provisions is likely inadequate to allow early termination of a fixed term agreement without paying out the remaining sums owed under the contract.
  • Ensure termination provisions are clear and unambiguous. Of course, every contractual term should be clear, but that requirement is especially crucial when dealing with provisions that convey a high price for failure to reap clarity.
  • Employers would do well to keep in mind, absent a provision in the agreement requiring that the employee attempt to mitigate, an employee has no obligation to mitigate his/her damages when a fixed term contract is terminated early.

This case further reinforces the fact that all employers should have their employment contracts reviewed before they are presented to prospective employees. Had the employer adhered to that advice, it could have saved hundreds of thousands of dollars in damages and legal fees.

 

Supporting Article Research Sources: Thompson Dorfman Sweatman LLP, Mondaq

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