Fixed term employment contracts – Employer beware

In hiring a new employee, an employer typically has the option to offer employment on an indefinite term or fixed term basis.  If hired under an indefinite term, the employment relationship continues indefinitely until either party opts to end it.  Conversely, if hired under a fixed term, the employment relationship is subject to a definite term with a fixed end date.

For different reasons, employers often believe there is an advantage in hiring an employee under a fixed term employment contract. 

However, as one Ontario employer recently learned, if the fixed term employment contract is not properly drafted there is potential exposure to substantial liability on a wrongful dismissal analysis. 

The Case (McGuinty v. 1845035 Ontario Inc.)

A funeral home hired McGuinty as its General Manager under a fixed term employment contract.  The fixed term was for ten years.  The employee was entitled to a base salary ($100,000.00 per year), commissions, healthcare benefits, company vehicle and golf club membership.

Significantly, the fixed term employment contract did not include a termination clause to provide for the rights and obligations between the parties should the employment relationship be terminated by the employer early (i.e. before the end of its lengthy fixed term).

Unfortunately, the employment relationship between employer and employee was strained from the outset. After approximately one year the relationship was irreparably damaged and McGuinty was constructively dismissed.

Following his termination, McGuinty sued for wrongful dismissal.  

Wrongful Dismissal Damages

If you assumed that McGuinty’s notice/severance entitlement (and therefore his wrongful dismissal damages) would be nominal given his short length of service you would be wrong.

In fact, the Ontario Superior Court of Justice awarded damages of approximately $1.3 million.

Why?  It’s all because of a poorly drafted fixed term employment contract.

Different from an indefinite term employee, if terminated early, an employee under a fixed term employment contract is entitled to wrongful dismissal damages equal to the loss of pay and benefits over the balance of the fixed term (with no obligation to mitigate) unless the contract has an “early out” termination clause.  In other words, as stated by the court:

“In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the fixed term, and that obligation will not be subject to mitigation.  Accordingly, the Plaintiff is entitled to the compensation and benefits he would have received had the contract been honoured.” 

Understanding there were approximately nine years left under the fixed term employment contract at the time McGuinty was dismissed, the wrongful dismissal damages included $900,000.00 in lost salary, $108,000.00 in loss of the use of the company vehicle, $90,000.00 in loss of healthcare benefits, $9,000.00 in loss of the golf club membership and approximately $125,000.00 in lost commissions. 

A tough (expensive) lesson learned for the employer.  

Employer Takeaways

While employment law principles applicable in this case are not new or novel, it does provide us with a stark example of the dangers associated with a fixed term employment contract that is not properly drafted. 

That is in addition to other pitfalls in using fixed term employment contracts.  For example, when the employment relationship is extended beyond the fixed term or if the fixed term is rolled over under successive employment contracts on the same terms and conditions, the fixed term converts to an indefinite term. 

What should you take away from all of this?

Consider the following tips:

1.    almost always, an indefinite term employment contract is preferable over a fixed term contract and poses less risk to the employer;

2.    only consider using a fixed term employment contract when you are hiring an employee on a temporary basis.  For example, they can be useful when hiring a pregnancy/parental leave replacement or an employee to complete a specific task or project; and 

3.    when using a fixed term employment contract you must ensure that the contract includes a properly drafted “early out” termination provision.  Under that provision you would reserve the right to terminate the employment relationship early or before the end of the fixed term on fixed and limited notice/severance. 

As always, it is important to understand the law and obtain sound employment law advice before entering into employment contracts.

Disclaimer: Information made available in this article is provided for general information purposes only and is provided without representation for its accuracy or completeness. It is not legal advice and should not be relied upon. You should not take any action or fail to take any action based on the information set out in this article or on this website.  Consult a lawyer at Sullivan Mahoney LLP and seek professional legal advice tailored to your unique situation.