We often come across fixed-term contracts in our legal practice. Employers have varying reasons for wanting to use such agreements. Perhaps funding for an employee is tied to third party grants, or an employer wants to temporarily replace an existing worker during their period of maternity leave. Whatever the justification, we generally advise employers to think twice before using fixed-term contracts.
There are very few situations where a fixed-term contract is better than one of indefinite duration. The reason for this boils down to risk of liability.
When an Ontario employer ends a fixed-term contract prematurely, by default, they are expected to pay out compensation for the balance of the remaining term. By contrast, when a contract of indefinite duration is terminated, a worker is by default only entitled to reasonable notice of dismissal.
Over the past several years there have been repeated examples of fixed-term contracts coming back to haunt employers.
For instance, a 2019 decision saw an employer who terminated a ten-year fixed-term contract after only one year ordered to pay a further nine years’ worth of compensation (at a cost of $1.2 million). More recently, in 2021, a Vice-President was dismissed one year into his three-year fixed-term. This resulted in a court ordering the employer to pay out compensation for the remaining two years (this time at a cost of $497,000.00).
Early termination clauses offer insufficient protection
It is possible (and highly advisable) for employers to allow for early termination of their fixed-term contracts. Many employers do just that, only to later learn that such contractual provisions fail to fully safeguard against future claims of wrongful dismissal.
The unfortunate reality is that drafting enforceable early termination provisions can be challenging. Ontario courts regularly strike down termination provisions in new and creative ways. For instance, an Ontario judge in 2023 struck down a termination clause for its use of “and/or” language, on the basis that this wording created ambiguity over whether statutory severance pay would be issued in applicable circumstances. The inclusion of a single extra word – in this case “or” – made all the difference.
Similarly, in the 2021 fixed-term contract decision referenced earlier this article, the employer did include an early termination provision. Sadly, it offered no protection, as the clause was deemed void for failing to comply with employment standards legislation.
While provision for early termination should be included in every agreement, employers should never assume that such clauses completely remove the inherent risks associated with using fixed-term contracts.
Do invalid termination clauses void fixed periods of employment?
Employers often search for novel ways to escape liability when it comes to ending fixed-term contracts prematurely. The recent decision in Kopyl v. Losani Homes (1988) LTD. is one such example.
Losani Homes had an early termination clause in its fixed-term contract with Kopyl. Unfortunately, it was acknowledged by both parties that this clause was unenforceable at law (for violation of employment standards legislation).
It was at this point, however, that Losani Homes got creative.
Losani Homes argued that the fixed-term nature of its contract was itself a type of termination clause. After all, a fixed period of employment, by definition, sets both a beginning and end to the relationship. Relying on this logic, Losani Homes asked the court to rule that if its early termination clause was unenforceable (as was agreed by the parties) then the contract’s fixed-term period should also be voided. In making this argument, Losani Homes relied upon jurisprudence from the Ontario Court of Appeal that any illegality will render all types of termination provisions in a contract unenforceable.
If the court accepted Losani Homes’ argument, Kopyl would only be entitled to reasonable notice of her dismissal (an amount likely to be far less than paying out the balance of the parties’ fixed-term).
Unfortunately for Losani Homes, the court rejected its submission. Justice Harper held that fixed periods of employment are not merely another type of termination clause, noting at paragraphs 11:
I find that a clause that fixes a term of the contract clearly and unambiguously to a defined term limit cannot be considered in the same light as a term in an employment contract that provides for early termination.
The result in Kopyl is somewhat reminiscent of the 2017 case of Roberts v. Zoomermedia Limited (which we wrote about here).
In Roberts, the employer attempted to argue that a termination provision in its own contract should be voided for violating employment standards legislation. This was done in a clear attempt to reduce the amount of money that would otherwise be payable to the worker. The Court of Appeal for Ontario rejected this argument, concluding that employers cannot attempt to use employment standards legislation as a sword for the purposes of reducing severance costs.
Justice Harper in Kopyl essentially reached a similar conclusion. He rejected the attempt by Losani Homes to reduce its liability by relying on an illegality it had created.
Takeaway
Ontario employers should generally avoid using fixed-term contracts. Such agreements simply come with too great a risk of liability. Moreover, as the Kopyl decision makes clear, employers cannot count on early termination provisions or creative legal arguments to come to their rescue.
In the select instances where employers (for whatever reason) believe fixed-term contracts are necessary or desirable, they are strongly advised to seek legal advice before proceeding further.
This article was originally published on July 14, 2023 at First Reference Talks.
Vey Willetts LLP is an Ottawa-based employment and labour law firm that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in Ottawa and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.