Clarity in term length is key for all contracts
Question: We originally signed an employee to a three-year contract for a general manager position. The contract is coming up for renewal and we want to offer a one-year term but otherwise the contract is the same. Can we change the term for the new contract? Would it be different if the employee had more than one three-year contract renewed in the past?
Answer: Generally speaking, absent express wording in the contract, the ability of the employer to change the term of the contract does not differ, even after multiple renewals. However, clarity in the wording of fixed term contracts is key. The termination and renewal provisions should be highly scrutinized for any employee notice requirements. The change in the duration of the term of the contract should also be made expressly clear to the affected employee, and she should have the option of seeking independent legal advice prior to signing the new contract.
Employers should also exercise caution where an employee signs a series of otherwise valid fixed term contracts over a lengthy period of time, as the courts may interpret the relationship as having become permanent and the contract term no longer valid.
The obvious advantage to fixed term contracts over indefinite employment is the amount of severance owed to the employee upon termination, which is limited to the duration and terms of the contract. If the employer terminates the employee before the end of a fixed term contract, the employee is usually entitled to receive her salary for the balance of the contract. Employees on a fixed term contract for 12 months or less, are generally not entitled to any notice of termination or severance pay at the contract’s end.
Employers shouldn’t rush to hire or place all existing employees on fixed term contracts. In certain situations, such as where an employee is hired to complete a certain task or replace a permanent employee on temporary leave, a fixed term contract makes sense. However, if the contract of employment is poorly worded or ambiguous in any way, courts will be quick to find the employees’ term of employment was indefinite, rather than fixed.
To create a fixed term contract, it must be clear that this is the intention. Courts require a true fixed term employment contract to be “unequivocal and explicit” in its language. Any ambiguities in the language of the contract will be interpreted strictly against the employer’s interest by the courts. In addition to the language of the contract, courts will also look at other factors, including the negotiations and signing of the contract, inequality of bargaining power, sophistication of the parties, and the offer or availability of independent legal advice prior to the signing of the contract.
Employers should beware of allowing an employee to continue to work after the end of a fixed term contract without signing another one. If so, it may be found the employee has become permanent.
The Supreme Court of Canada has also confirmed an employee whose fixed term contract is breached during the contractual term must still mitigate her damages. Any sums earned within the balance of the term must be deducted from the employer’s liability. This is, of course, subject to the wording of the individual contract. Furthermore, if the wording of the contract requires payment of severance immediately following the breach of the contractual term, the fact the payment is to be made prior to the time when either the employer or the employee could know whether mitigation could occur implicitly suggests a waiver of that obligation.
