Fixed Term Employment Agreements and Employee Severance

Fixed term employment contracts can serve a useful purpose within an organization. They permit employers to limit the engagement of an employee to a set project or a fixed period of time. In circumstances where there is a significant fluctuation in annual work volume or where temporary staff are required to offset absences (such as due to illness or a parental leave) fixed term contracts may be ideal.

The use of fixed term employment agreements, however, can result in significant inadvertent liability for employers when not properly executed. The primary source of this liability is severance, which becomes due and owing on termination of employment. For instance, unless a fixed term employment agreement specifies the severance entitlement that an individual will receive upon early termination of the agreement, the worker will generally be entitled to receive the balance owing on the remainder of the fixed term.

The implications of this reality can be quite severe. For example, consider a temporary employee working on a two-year fixed term contract earning $52,000.00 per year. If this employee is fired after ten weeks on the job, she may be eligible to seek the remaining balance of the contract: $94,000.00. Compare this to the severance requirements under the Employment Standards Act, 2000 when dismissing an indefinite-term employee of 10 weeks’ tenure: $0 (under the ESA employees with less than 3 months’ service are not entitled to receive any severance).

A recent case from the Ontario Superior Court of Justice, Ballim v. Bausch & Lomb Canada Inc., provides a practical example of the potential pitfalls of fixed term contracts.

Ms. Ballim accepted a one-year fixed term employment agreement to cover a maternity leave. She received a written employment contract that provided for bi-weekly salary payments of $2,230.77 in 26 installments. Ms. Ballim signed the employment contract and began work. Approximately one month after starting work, Ms. Ballim sought unpaid personal leave to travel to South Africa. The Defendant approved the leave, but upon her return to work dismissed Ms. Ballim on a without cause basis.

Ms. Ballim then commenced legal action seeking the value of the unexpired portion of the fixed-term. In the course of its judgment, the Court confirmed that: 

the employee has the onus of establishing that the contract was for a fixed term. The onus is on the plaintiff because fixed term contracts are the exception and not the rule. To be fixed, the intention of the parties must be clearly expressed and unequivocal. (at para 18)

Justice Lederman then concluded that the employment agreement agreed to by the parties was in fact for a fixed one-year term. Consequently, Bausch & Lomb were ordered to pay out 38.5 weeks’ compensation to Ms. Ballim ($42,942.32), representing the remaining balance of the one-year term. 

Lessons for Ontario Employers and Employees:

1. As an employee, if you agree to work on a fixed-term contract and subsequently are let go before the term has expired, speak with an employment lawyer to ensure that you receive all payments due and owing to you under the terms of the employment agreement. It is possible that you may have significant compensation outstanding.
    
2. As an employer that seeks to engage an employee on the basis of a fixed-term agreement, take the following steps:
    
   1. Ensure that the employment agreement is reduced to writing and expressly agreed to by both parties prior to the commencement of employment; and
       
   2. Look to include a clause within the written employment agreement that sets out clearly what will happen in the event of a termination. Specifically, indicate what payments will be due to the employee.

Failing to take these steps may result in a situation where silence proves costly. It should also be remembered that unlike common law notice, which is subject to the employee’s duty to mitigate loss of employment, the balance owing on a fixed term contract (absent language to the contrary) is not subject to any such mitigation obligation. Accordingly, it is a contractual entitlement that becomes payable in full regardless of an employee’s post-dismissal earnings.

Vey Willetts LLP is an Ottawa-based employment and labour law firm that provides timely and effective legal advice to employers and employees in Ottawa and across Ontario. To speak with an Ottawa employment lawyer, please contact: info@vwlawyers.ca or 613-238-4430.