Howard Levitt: Why employers should tread carefully around fixed-term contracts

On the surface, fixed-terms limit risk, but if the employment relationship sours, they can be costly

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Howard Levitt and Madelena Viksne

Our employer clients often ask us to draft fixed-term employment contracts for their employees. Our answer is almost invariably “no” and that fixed-term contracts are virtually always a mistake. Superficially, a fixed-term employment agreement may seem to be a perfect solution for a temporary leave of absence (such as pregnancy/parental leave) or a promise that the employee will stick around for the certain time period when they are most needed.

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In reality, fixed-term employment contracts are problematic.

The idea of a fixed-term contract is that it allows for both parties to have certainty about the length of the employment relationship from day one. This eliminates the requirement for providing notice of termination (or pay in lieu thereof) in the event that the employee works the entire contract term. However, this is not necessarily the case.

If the employer ends the relationship before the end of the fixed term, which happens often, the cost to the employer will be significant unless the termination language in the contract is enforceable at law. In most provinces, the employer will have to pay the entire balance of the fixed term, which can be far greater than the regular severance. This is true whether the term was one year, five years or in some cases, even longer.

The issue of unenforceable termination language in a fixed-term contract was recently addressed by the Ontario Court of Appeal in Kopyl v. Losani Homes (1998) Ltd. That employer dismissed an employee six months into a one-year fixed-term contract. The termination clauses in that contract were in breach of the Employment Standards Act and the employee was therefore entitled to the six-month balance of the fixed term. Interestingly, the employer argued that, if the termination clause was invalid, so was the entirety of the fixed term. In other words, the employer argued if the other termination language was unenforceable, the fixed term itself was also invalid, meaning the employer did not owe the balance. The court dismissed this argument and ordered that the employer pay the balance of the one-year fixed-term contract — six months — despite the fact that one month (which would normally be more likely appropriate for some one-year employees) had already been provided.

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This is consistent with the court’s approach that invalid termination clauses can be set aside by the employee but not by the employer that drafted them.

There are several difficulties an employer faces in trying to end a fixed-term contract early. For this reason, these agreements are not, in our view, advisable.

First, it is necessary for the employment agreement to contain an enforceable termination clause that will allow the employer to end the agreement early. It is impossible to have absolute certainty in regards to termination clauses since the law around this is one of the most frequently changing aspects in our practice area and the decisions militate overwhelmingly in favour of employees.

Additionally, if the employer forgets to have the employee stop working as of the date the contract expires and the employee works beyond the end date, the contract will either automatically renew, or the employee becomes entitled to wrongful dismissal damages they would not have otherwise received.

Another issue is that if a fixed-term contract is renewed several times, the courts will interpret it as an ongoing and indefinite employment agreement

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You cannot know for certain — regardless of your interview process — the suitability of any employee for any position or workplace. If they don’t fit the needs of the business, you do not want to have to terminate their fixed term early and double your expenses relating to that position. If they were hired on a fixed-term agreement, employers will have to pay not only the balance of their contract, but also pay to find, train and employ their replacement for the same period.

For these reasons, the best approach for any employer is to hire employees on an indefinite basis subject to an employment contract with a strong, effective termination clause that allows for the employer to terminate the relationship without cause in strict compliance with applicable employment legislation, but which eliminates the possibility of any further entitlements owing to the employee.

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This is true even if you have a vacancy you do not foresee being long-term and anticipate you may have to make difficult decisions around ongoing employment for staff if, for instance, an existing employee comes back to work. A fixed-term contract does not alleviate these challenges, and in fact, is likely to hurt your budget far more.

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada.

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