Status after expiry of fixed-term contract

Question: If a worker on a fixed-term contract continues to work after the end date of the contract, does the employment continue under the same terms of the original contract? Is the contract considered renewed for the same term or does the worker become permanently employed?

Answer: Employers should be careful when using fixed-term employment contracts, because they can give rise to unexpected liabilities.

Fixed-term contracts are designed to be used in situations where an employee is hired for a defined period of time or a specific project. At common law, the employment relationship ends on the expiry of the fixed term, and unless the contract provides otherwise, the employer does not need to give the employee any advance notice of dismissal or severance compensation.

Similarly, employers are often exempted from having to provide statutory notice or severance compensation to an employee whose employment terminates on the expiry of a definite term employment contract. An example can be found in s. 65(1)(b) of the British Columbia Employment Standards Act. In some cases, however, this exemption will only apply if the term of the contract was 12 months or less: see, for example s. 2(1) of Ontario’s Termination and Severance of Employment regulation, and s. 55(2)(c) of the Alberta’s Employment Standards Code.

Where a fixed-term employment contract is used, it is prudent to include a clause that allows the employer to dismiss the employee without cause before the expiry of the fixed term, by providing a specified amount of working notice or severance compensation (which must meet or exceed the employee’s entitlement under the applicable employment standards legislation). Otherwise, if the employer terminates the contract early without cause, it will be required to pay the employee until the end of the term, less any mitigation earnings.

Another area of potential difficulty is the situation where an employee works under a series of successive fixed-term employment contracts. Here, the court may rule that the employment relationship is in substance one of indefinite duration, thereby entitling the employee to reasonable notice of dismissal at common law. In Ceccol v. Ontario Gymnastics Federation, for example, the employee worked under a one-year employment contract, which was renewed annually. After 16 years of employment, the employer notified the employee her contract would not be renewed for another term. The employee sued for wrongful dismissal. The court ruled that she was effectively employed for an indefinite period, despite the fact that she had a fixed-term contract. Accordingly, the employer was ordered to pay her damages in lieu of 16 months’ notice of dismissal.

The situation asked about here can also be problematic for employers. If an employee who has a fixed-term employment contract continues working beyond the contract’s expiry date without a new agreement being concluded, the term of the employment relationship will become indefinite, and the employer will need to provide the employee with notice of dismissal or severance compensation in accordance with the employee’s common law and statutory entitlements if it decides to dismiss the employee without cause. This can expose the employer to significant liabilities, which could have been avoided if the employer had paid closer attention to the expiry date of the contract.

Where a fixed-term contract expires and the employee continues to work, the other material terms of the employment relationship will usually remain the same as those contained in the expired contract. In Mitchell Energy Corp. v. Canterra Energy Ltd., for example, the employee kept on working after the expiry of a fixed-term employment contract. The court noted that the parties had continued to behave as though the contract was still in effect, and ruled the implied terms of their employment relationship were accordingly the same as those that appeared in the expired contract. The result may not be the same, however, if the employer wants to rely on a termination clause or restrictive covenant that was contained in the fixed-term employment contract. The enforceability of those provisions may be called into question if the term of the contract has expired.