The dangers of fixed-term contracts
There can be some surprising obligations when it comes to terminations
Jan 26, 2015
By Stuart Rudner
Many employers like to use fixed-term contracts of employment to minimize or eliminate any obligation to provide pay in lieu of notice, or severance, if they choose to terminate the relationship. However, there are nuances to fixed-term contracts of employment that are not widely understood and can expose organizations to substantial liability.
The vast majority of employment contracts in Canada are of indefinite duration, with no fixed end date. As regular readers will know, such contracts can be terminated by the employer upon the provision of notice of termination, or pay in lieu thereof. The amount of notice, or pay in lieu, that must be provided is to be determined based upon contract (if an enforceable termination clause exists), or a combination of statute and common law.
In the absence of an enforceable termination clause, the common law requires that the employer provide "reasonable notice" of termination. How that is calculated has been discussed in many contexts, including this blog post.
Many employers decide they want to avoid the obligation to provide notice or termination pay by simply offering an employee work for a fixed period of time. The theory is that when the contract ends, they will have no further obligation to the individual, unless they choose to renew the contract. While that is true, the use of a fixed-term contract can also create some surprising obligations.
To begin with, if there is no termination clause in the contract, then the employer has no right to terminate the contract early. If it purports to do so, then it must pay the employee for the balance of the contract. In some cases, this can result in far more pay in lieu of notice than the individual would be entitled to at common law.
I have been involved in several situations where an employer terminated a fixed-term contract by providing either the statutory minimum amount of pay in lieu of notice, or some slightly greater amount that might accord with common-law principles. Either way, the employer never considered the possibility that because it entered into a fixed-term contract, it did not have the right terminate early and would be on the hook for the balance of the contract.
For the reasons set out above, when I work with an employer that wants to put a fixed-term contract of employment in place, I always include a termination provision that allows the employer to bring about an early end to the employment relationship.
Sometimes, a confusing situation will arise where the amount of notice of termination required by the termination clause is more than the amount of time remaining on the contract. In that case, the question arises as to whether the employer must provide termination pay in accordance with the termination clause, or simply pay the employee for the remainder of the contract. This was an issue in a recent decision rendered by the Alberta Court of Appeal.
In Thompson v. Cardel Homes Limited Partnership, the plaintiff was a senior executive hired pursuant to a two-year contract that was subsequently renewed for one more year. There were detailed termination clauses in the contract, including one that provided for a 12-month severance payment in the event of the early termination of the relationship by the employer.
One month before the contract would have ended, the employee was advised the contract would not be renewed. He was also told not to bother coming back to work for the remaining month, and to make arrangements to obtain his personal effects.
The first issue before the court was whether the plaintiff was terminated before the end of his contract or simply given notice it would not be renewed. The court relied upon the fact that the plaintiff was told not to bother working for the last month. This was deemed to be a constructive dismissal and, by law, a termination of the contract. As a result, the court found that the termination clause, requiring a severance payment equivalent to 12 months of compensation, had been triggered.
Needless to say, it would have been far less expensive for the company in that case to simply advise the employee the contract was not going to be renewed, but allow him to work through the balance of the current contract. By proceeding as it did, it inadvertently triggered the termination clause, which required 12 months of severance when only one month remained on the contractual term.
As discussed in other blog posts, there are many misconceptions regarding "contract employees," which some people use to mean employees working pursuant to a fixed-term contract and others to independent contractors. Some employers seem to think that having an employee on a fixed-term contract relieves them of the obligation of providing benefits. This is based upon a misconception regarding employment law generally.
There is no obligation to provide benefits to employees, and all forms of compensation are subject to negotiation between the parties. An individual can be hired on an indefinite basis and not be entitled to benefits if that is the contract that is entered into.
The other reason usually put forward for the use of a fixed-term contract is the desire to avoid termination pay. While it is true a fixed term of employment can be allowed to come to an end without the need for termination pay, if the contract is renewed repeatedly, there is a very significant risk a court will find it became a contract of indefinite duration. Other risks include those set out above, such as the potential obligation to pay the individual for the entire duration of the contract, and the inadvertent triggering of termination obligations which exceed those that might exist at common law.
Employers should think carefully, and obtain advice from an employment lawyer, before making the decision that a fixed-term contract is advisable. They make good sense in some contexts but employers should understand the risks involved. Similarly, employees presented with a fixed-term contract of employment should always seek legal advice in order to understand the rights they may be foregoing.
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Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw
. He can be reached at email@example.com