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Fixed-Term Fiasco: Employee Profits off of Termination of Term Contract

Canadian employees are presumptively entitled to “reasonable notice” of termination.  Although this entitlement can be limited to some extent by contract, an employee will generally be entitled to some advance notice of the end of their employment. If advance notice is not given, then the employer can satisfy this obligation by making a payment equivalent to the earnings the employee would have received over the notice period.

The law is very different with respect to fixed-term contracts.  Effectively, in a fixed-term contract the employee is provided with notice of termination the day she enters into the contract.  The catch is that absent contractual language limiting the employee’s entitlements on early termination, the employee is entitled to pay in lieu of the balance of the fixed term.

The Ontario Court of Appeal recently clarified and reaffirmed this principle in Howard v Benson Group Inc. (The Benson Group Inc.) The employee was engaged as a sales development manager for an automotive service centre.  The employment contract was of a five year length.  The employer dismissed the employee without cause after twenty-three months of service.

The matter was dealt with at first instance on a motion for summary judgment.  The motion judge rejected the employee’s argument that the presumption of reasonable notice was rebutted by the employment contract’s fixed-term duration.  The motion judge found that the absence of a specific notice provision meant that the employee was entitled to damages in respect of reasonable notice, rather than to the end of the contract.

However, this victory for the employer was short-lived.  On appeal, the Court held that the employee was entitled by default to compensation for the balance of the fixed term.

The Court found that the mere fact that the contract was a fixed-term contract was sufficient in and of itself to rebut the presumption of reasonable notice.

The Court also found that it would have been well within the ability of the employer to draft a clause limiting the employee’s entitlements in the case of an early termination.  The Court interpreted the employer’s decision not to do so as evidence that the employer intended to be bound by the contractual fixed-term guarantee.

As a result, rather than the common-law, “reasonable notice” period for this relatively short-serve employee, which would likely be at most three or four months, the employer instead was liable for 37 months of notice, that being the remainder of the contract.  37 months is longer than any reasonable notice period ever awarded by a Canadian court.

What Employers Should Know

Employers seeking to use fixed-term contracts to maximize their flexibility must bear in mind that the law governing employee entitlements on termination is quite different than that governing indefinite employment relationships.  Unless the employer intends to guarantee the employee’s employment for the duration of the fixed term contract, early termination language is essential.  Employers must be careful to ensure such language is clear and complies with local employment standards.  Absent such language, courts will impute the intention to guarantee the duration of the fixed-term contract.

At the 17th annual Ontario Employment Law Conference, presented by Stringer LLP and First Reference Inc., an afternoon Breakout Session will focus on terminations of employment, including practical advice on how to assess your organization’s potential liability to employees upon termination of employment. This is one of three afternoon Breakout Sessions that attendees can choose from. The Ontario Employment Law Conference will take place at the Corporate Event Centre at CHSI in Mississauga on June 2, 2016. We look forward to seeing you and helping you apply the latest employment and labour law changes. Come and learn the latest!

This blog was first posted on First Reference Talks.

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