A fixed-term employment contract may appear attractive to an employer because it provides flexibility to respond to fluctuating operational needs and creates cost certainty. However, the risks to an employer associated with a fixed-term contract can be considerable, particularly if an employer uses successive fixed-term contracts with an employee or terminates the employment relationship before the expiry of the fixed-term.
The reality is, in most cases, a fixed-term contract provides no greater protection to an employer than a well drafted contract for an indefinite term that includes an enforceable termination clause. As such, we often encourage clients to rethink their desire for a fixed-term contract.
Successive fixed-term contracts – not as advertised
If a fixed-term contract is properly drafted and executed, when it expires an employer is not obligated to provide notice of termination or pay in lieu, unless expressly required by statute.[1] The contract simply ends.
However, reality is often different from theory. For example, if an employer and employee enter into a series of successive fixed-term contracts (as opposed to a single contract for an indefinite term), and one of the fixed-term contracts is allowed to lapse by even a day before a new contract is signed, this gap can potentially void the entire series of contracts converting them into a single contract of continuous employment under the common law. Similarly, in some circumstances, courts have been willing to void a series of fixed-term contracts that span a number of years where it was clear to the court the arrangement was more akin to a single contract for an indefinite term.
Two ways to avoid this risk are: i. rather than a fixed-term contract, use a contract for an indefinite term with an enforceable termination clause; or, ii. ensure administrative protocols are in place so there are no gaps between successive fixed-term contracts (easier said than done).
An “early termination clause” is a must
It is important to consider an early termination clause for any fixed-term contract.
Generally, an employee on a fixed-term contract without an early termination clause is entitled to be paid the balance of the contract if employment terminates prior to the expiry of the term. Courts have also held that an employee has no duty to mitigate in this context, meaning the employee has no obligation to take reasonable steps to find replacement employment income which would reduce the amount of damages owed by the former employer for breaching the fixed-term contract. For example, in the absence of an enforceable early termination clause, an employee with a two-year fixed-term contract who is let go six months into the term, will be entitled to a pay-out equal to the amount the employee would have earned over the remaining 18 months. By contrast, an early termination clause might limit termination entitlements to a lesser amount agreed to by the parties, or even to employment standards minimums which, in every Canadian jurisdiction, are measured in weeks, not months.
Employee versus independent contractor – an important distinction
In a recent decision of the Court of Appeal for Ontario, the court addressed two issues: i. the damages owed to an independent contractor (as opposed to an employee) when a fixed-term contract is terminated prior to its expiry; and ii. whether an independent contractor has a duty to mitigate damages.[2]
The court held that, as with an employee, absent an early termination clause, an independent contractor is entitled to the balance owning on the term. However, unlike an employee, an independent contractor has a duty to mitigate damages because an independent contractor is not dependent on an employer to the same extent:
The trial judge erred by conflating the situation of independent contractors with that of employees working under fixed-term contracts…this court has never held that independent contractors do not have a duty to mitigate following breach of a fixed-term contract.
A duty to mitigate arises when a contract is breached, including contracts with independent contractors. Of course, the terms of a contract may provide otherwise. However, nothing in this case takes it outside the normal circumstances in which mitigation is required. For example, the respondent was not in an exclusive, employee-like relationship with the appellants, nor was he dependent on the appellants; the terms of the contract permitted the respondent to perform services for other parties.
This is welcome clarification from the Court of Appeal, and also a reminder that a court will consider the actual characteristics of a workplace arrangement, including the level of exclusivity, not merely the label parties attach to it.
The court also reiterated that the burden to establish an independent contractor has failed to mitigate rests with the company.
Lessons for employers
As noted at the outset, generally, a fixed-term contract provides no greater protection to an employer than a well drafted contract for an indefinite period. Even for a short-term employee or independent contractor, a properly drafted contract that limits entitlements on termination can provide the same level of flexibility and cost certainty at the end of the relationship.
For these reasons, we often encourage clients to rethink their desire for a fixed-term contract. That said, if a fixed-term contract is appropriate for the circumstances, we work with our clients to draft an enforceable contract that protects their interests and minimizes risk to the extent possible.
To learn more and for assistance, contact your Sherrard Kuzz LLP lawyer or info@sherrardkuzz.com
[1] For example, under the Ontario Employment Standards Act, 2000 an employee will still be entitled to statutory notice of termination, or pay in lieu, if the term of the fixed-term contract is more than twelve months.
[2] Monterosso v Metro Freightliner Hamilton Inc., 2023 ONCA 413 [Monterosso]
