Understanding fixed-term contracts

By Stuart Rudner 

In a blog post earlier this year, I discussed the dangers of fixed-term contracts and, in particular, the fact that if a fixed-term contract does not have a termination clause, it cannot be terminated early.

Many employers unknowingly expose themselves to significant liability by purporting to end a fixed-term contract early. 

Unlike the typical dismissal of an employee who is working pursuant to a contract without a fixed end date, the concept of “reasonable notice" does not apply and the employer must pay for the balance of the contract.

Effectively, an organization will typically have to choose between continuing to pay the employee to work for the balance of the contract, or pay her not to work. This is not a particularly appealing set of options, which is why every contract, including those of fixed term, should have a termination clause. 

The quickest and easiest negotiation I have entered into on behalf of a client involved a woman who was employed pursuant to a fixed-term contract that did not have an "escape clause." In other words, there was no provision that allowed either party to terminate the contract early.

Unfortunately for the employer, it made the decision to terminate the contract several months before it was scheduled to end. It assumed that since the employment had been of short duration, the severance obligation would be minimal, and it offered a few weeks.

We sent one letter on behalf of this dismissed employee, explaining that the law does not work as it seem to have assumed, and it was legally required to pay our client for the balance of the contract. The company paid up very quickly. 

That being said, a recent case adjudicated by the Ontario Superior Court of Justice had a somewhat unexpected result. In Howard v. Benson, the individual was hired pursuant to a fixed-term contract that was to last for a period of five years. However, before two years had elapsed, things started to go south and the employer made the decision to terminate.

In that case, there was a termination clause, which read as follows: 

“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 plaintiff argued that the clause was unenforceable as the phrase “any amounts paid" was ambiguous in the sense it did not explicitly reference benefits or bonuses. Not surprisingly, in light of jurisprudence over the last few years striking out termination clauses, the court agreed, finding that the clause was ambiguous and, therefore, unenforceable. 

One might have expected that once the termination clause was deemed to be unenforceable, the parties would revert to a situation, like those discussed above, where there was a fixed-term contract with no termination clause. The plaintiff made that argument, asserting he was therefore entitled to be paid for the balance of the five-year term.

However, the employer argued this would have been contrary to the intentions of the parties and, somewhat surprisingly, the court agreed. 

The matter has not yet been concluded, as the court found that the employee was entitled to reasonable notice of termination, but it has not yet pronounced judgment on what that will be, as well as whether the plaintiff made reasonable efforts to mitigate his damages. 

While on the one hand this is yet another example of a termination clause being struck down by the courts as ambiguous, it is also a case employers should receive warmly, as it suggests they will not have to pay the balance of a fixed-term contract in every case where there is no enforceable termination clause. 

That being said, employers are wise to include well-worded termination clauses in every employment contract, whether it be for a fixed term or, as is more common, for indefinite duration. We've seen many termination clauses struck out in recent years, and the onus is on the employer to satisfy a court the clause they seek to rely upon should be enforced. It is critical they work with employment lawyers in that context. 

At the same time, employees who accept fixed-term contracts of employment must understand the consequences thereof. This is particularly true where there is a termination clause, which means the employee may have even less certainty with respect to her future.