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Termination clauses and fixed-term contracts

Employers are often surprised to learn they do not automatically have the option to terminate early and provide reasonable notice

By Stuart Rudner

Although this aspect of the law has been settled for some time, it often comes as a surprise to both employers and employees that if they enter into a contract of fixed duration, the employer does not automatically have the option to terminate early and provide reasonable notice as it would in the "typical" dismissal without cause. 

I have discussed this, and other issues relating to fixed term contracts, previously: 
http://www.hrreporter.com/blog/Canadian-HR-Law/archive/2015/07/14/understanding-fixed-term-contracts
http://www.hrreporter.com/blog/Canadian-HR-Law/archive/2015/03/09/when-will-courts-deem-a-fixed-term-contract-of-employment-to-be-indefinite
http://www.hrreporter.com/blog/Canadian-HR-Law/archive/2015/01/26/the-dangers-of-fixed-term-contracts

We all know that in the absence of just cause for dismissal, an employer must provide reasonable notice of dismissal when it wants to end an employment relationship. Sometimes, employers will hire someone for a fixed period of time.
They may do so due to the fact that the hiring is to replace an employee on leave, or for a specific project, or because they are dependent upon funding decisions, or simply because they do not want to have any severance obligations at the end of the contract. 

Whatever the reason, it can come back to haunt them if they do not draft the contract properly. In the Ontario Court of Appeal’s recent decision in Howard v. Benson Group Inc., the court had to consider a situation in which John Howard was hired pursuant to a five-year contract. Section 8.1 of the contract provided as follows: 

“Employment may be terminated at any time by the employer and any amounts paid to the employee should be in accordance with the Employment Standards Act of Ontario.” 

Less than two years into the contract, the employer purported to terminate Howard on a without cause basis and provided him with two weeks of pay in lieu of notice. The plaintiff took the position that section 8.1 was unenforceable as it did not clearly and unambiguously displace his common law right to reasonable notice. 

On a motion for summary judgment, the motions court judge agreed and struck out this clause. As a result, since there was no enforceable termination clause in place, the court had to decide whether Howard was entitled to reasonable notice pursuant to common law or, as he asserted, entitled to be compensated for the balance of the contract, which was more than three years. 

The motions court judge found that the common law would prevail. However, the Court of Appeal found as follows: 

“Where an employment agreement states unambiguously that the employment is for a fixed term, the employment relationship automatically terminates at the end of the term without any obligation on the employer to provide notice or payment in lieu of notice. Such a provision, if stated unambiguously, will oust the implied term that reasonable notice must be given for termination without cause.” 

Having found that the common law entitlement to reasonable notice had been displaced, the court went on to confirm that "if the parties to a fixed-term employment contract do not specify a pre-determined notice period, an employee is entitled on early termination to the wages the employee would have received to the end of the term.” 

In other words, the Court of Appeal confirmed that in the absence of an enforceable termination clause, the employee is entitled to be paid for the entirety of the contract. 

The employer also argued that the plaintiff had an obligation to mitigate his damages. As we all know, in most dismissals, employees will have an obligation to make reasonable efforts to seek new employment, and any employment or self-employment income generated during the applicable notice will be deducted from the amounts that must be paid. 

The Court Of Appeal held that such is not the case in the context of a fixed-term contract of employment, as was previously confirmed in Bowes v. Goss Power Products Ltd. In that context, the employee does not have a duty to mitigate. 

Ultimately, the plaintiff was successful in recovering the full amount of wages that he would have been paid had he worked for the entire duration of the five-year contract, and he was not required to attempt to mitigate his damages.

Takeaways 

We often advise employers to include termination clauses in employment contracts, as this will provide certainty for both parties and may minimize severance obligations. Some employers choose to hire individuals pursuant to fixed-term contracts; they are certainly entitled to do so, but should never forget to include early termination provisions. Otherwise, to their shock, they may be on the hook for far more than “reasonable notice" at common law. 

This happened to a company that I dealt with years ago when I was retained by an individual who had been dismissed roughly halfway through their contract of employment and provided with minimal notice. When I wrote to the employer and advised it that since there was no termination clause in the contract, it was liable for the balance of the term, it obviously sought legal advice and quickly paid up. Undoubtedly, this was entirely unforeseen on its part. 

All parties should seek legal advice before entering into any contract of employment, in order to prevent surprises like this. 


© Copyright Canadian HR Reporter, Thomson Reuters Canada Limited. All rights reserved.

Stuart Rudner

Stuart Rudner, Employment Lawyer and MediatorStuart Rudner is the founder of Rudner Law (RudnerLaw.ca), a firm specializing in Employment Law and Mediation. He can be reached at stuart@rudnerlaw.ca, (416) 864-8500 or (905) 209-6999, and you can follow on Twitter @RudnerLaw.
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