Dangers of fixed-term contracts

Without a termination clause, employers ending a contract early will be on the hook for the balance of the term

Stuart Rudner

By Stuart Rudner

Sometimes, employers hire individuals pursuant to fixed-term contracts. They often do so in order to reduce or avoid perceived liabilities. However, in many cases they expose themselves to other liabilities unnecessarily, when their goals could have been achieved through the use of an indefinite contract of employment with provision for minimal notice of dismissal.

Fixed-term contracts of employment are appropriate in some circumstances. For example, if an individual has been hired to replace an employee on leave, or specifically to assist with a particular project, or any other situation where there is a logical “conclusion” to the relationship, then it may be appropriate to use a contract of fixed duration.

One of the most common mistakes  employers make when implementing fixed-term contracts is the failure to include a termination clause. In the typical situation where there is an indefinite contract of employment without a termination clause, the employer will be required to provide “reasonable notice” of dismissal or pay in lieu thereof.  The specific amount will depend upon the number of factors, including the employee’s length of service, age and position. 

However, in the case of a fixed-term contract without a termination clause, the law, which many employers are not aware of, is that if the employer wants to terminate the contract early, they will be obligated to pay the employee for the balance of the contract (unless there is just cause for dismissal). Obviously, this can be a particularly onerous obligation.

As a result, I always advise clients to include termination provisions in the contract of employment. So long as the contract is entered into properly, and the amount of notice is not less than that required by applicable legislation, then the termination provision will be enforceable. 

Of course, if there is a termination clause requiring only minimal notice of dismissal, then in many cases having a fixed-term contract will not be particularly beneficial, particularly where an end date is not clear at the time of hire.  In that case, the employer may as well use a contract of indefinite duration but rely upon the termination clause.  The only difference will be that, if there is a fixed-term contract, then there would be no obligation to provide notice of dismissal, or pay in lieu thereof, at the end of the contract. However, if the contract only requires a minimal notice anyway, then the additional cost will be minimal.

Another risk arising out of the use of fixed-term contracts is the possibility they will be renewed and, ultimately, be deemed by a court to be a contract of indefinite duration. While there is no hard-and-fast rule regarding how often or how long employment contracts can be renewed before they become indefinite, the reality is courts will look at situations where a fixed-term contract is renewed over and over again, often automatically without any real discussion, and often conclude it is really a contract of indefinite duration. In such circumstances, the employer will be obligated to provide reasonable notice of dismissal. Again, it may be more strategic to use a contract of indefinite duration with a minimal requirement for notice of dismissal.

One other issue that arises occasionally is that employers are of the mistaken view employees “on contract,” or part-time employees, are not entitled to benefits and other compensation “regular” employees are entitled to.  However, the reality is that other than statutorily required items, such as employment insurance and pension contributions, there is no law that says “employees” are entitled to certain benefits and others are not. This is a matter of contract with the individual employee.  

The bottom line is many of the perceived benefits of fixed-term contracts are illusory or can be achieved through other means. Employers should be aware of the risks involved in hiring employees pursuant to fixed-term contracts, and ensure that the contracts are drafted carefully in order to minimize them. Alternatively, they should consider indefinite contracts with minimal notice requirements.

Stuart Rudner is a partner in the Labour & Employment Law Group of Miller Thomson LLP, a national law firm. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or srudner@millerthomson.com. You can also follow him on Twitter @CanadianHRLaw and join his Canadian Employment Law Group on LinkedIn.

Latest stories