When will courts deem a fixed-term contract of employment to be indefinite?

These contracts can be quite strategic, but should only be used in appropriate circumstances

Stuart Rudner

By Stuart Rudner

In a recent blog post, I discussed issues that can arise when employers use fixed-term contracts but do not appreciate some of the nuances regarding the termination thereof.

Another common danger of fixed-term employment contracts is the fact that, in some circumstances, courts will deem them contracts of indefinite employmentdespite explicit wording to the contrary. In other words, the purpose of having a fixed-term contract may be defeated. 

This issue was most recently considered in Michela v. St. Thomas of Villanova Catholic School, a decision of the Ontario Superior Court of Justice involving teachers. In that case, three teachers took the position that despite the fact they had been employed pursuant to successive one-year contracts, they were truly working pursuant to contracts of indefinite duration. 

The court considered the following facts:

•the contracts contained both renewal and early termination clauses

•the school indicated that they were subject to review on an annual basis

•the school had represented to the teachers that their contracts would be renewed annually

•the staff handbook clearly contemplated long-term employment relationships

•there was an expectation of renewal. 

When the school advised the three teachers that, due to low enrolment, their contracts would not be renewed, they sued for wrongful dismissal. The court agreed with them, finding that the Ontario Court of Appeal had clearly stated in Ceccol v. Ontario Gymnastic Federation that when the underlying reality of an employment relationship suggests one of indefinite duration, then successive fixed-term contracts can be deemed to be a contract of indefinite employment. That decision also confirmed that employers should not be allowed to avoid obligations, such as the duty to provide notice of dismissal, through the use of fixed-term contracts that are not in line with reality. 

I am often consulted by clients who want to put fixed-term contracts of employment in place. For reasons discussed previously, many of the purported benefits of fixed-term contracts are largely illusory. Furthermore, employers must recognize that the courts will look behind the wording of a contract and assess the reality.

If fixed-term contracts are automatically renewed, without any real discussion, and it is taken for granted the employee is, therefore, long-term, the fixed-term nature of the written contract will be ignored. 

Contrary to popular belief, there is no “magic number"the courts will not automatically deem a contract to be one of indefinite duration after a certain number of years. However, they will assess the specific facts of each case in order to assess the reality and determine whether the contract was really one of fixed duration and renewed pursuant to consideration and discussion, or was assumed to be for the long-term.

In many cases, the courts will find that the fixed-term contract was a sham designed to avoid legal obligations, and the employer intended to continue renewing the contract until it wanted to terminate the relationship. 

When they make sense

Conversely, there are situations where fixed-term contracts of employment are perfectly appropriate. This would include situations where a replacement is required for an employee on leave, as well as situations where employment is subject to funding.

For example, I work with many not-for-profit organizations that are largely dependent upon government or third-party funding. They genuinely do not know whether they will be in a position to continue employing someone in the future, as the funding is typically renewed on an annual basis. As such, it is prudent to put a fixed-term contract of employment in place.

If that is the case, then the offer letter should clearly explain why the contract is for a fixed term. This will help the employer to justify its position and satisfy a court that the contract was not simply an attempt to avoid legal obligations that would arise if the contract was of indefinite duration.

The organization can also document the discussions each year, and the fact that since funding was made available, it is able to offer a renewal to the individual. 

If there is good reason for a fixed-term contract, that should be made clear in the documentation. Furthermore, the offer letter or contract should be unambiguous with respect to the term of the relationship.

For example, it should be clear renewal is not automatic and will be dependent upon the applicable factors. Active discussions to renew should be documented and not treated as a formality. Employers should also be mindful of changing circumstances and if the underlying reason for the fixed-term nature of the contract, such as unpredictable funding, should change, then they may want to consider changing the contractual relationship as well.

Ultimately, many employers find efforts to reduce legal obligations backfire when courts assess fixed-term contracts of employment and the underlying facts. Fixed-term contracts can be quite strategic, but should only be used in appropriate circumstances and should be clearly documented.

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