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Fixed-Term Contracts: An Employer’s Guide to Avoiding Hidden Traps

24-Apr-17

By Alexander MacDonald

Fixed-term contracts are an important tool for employers. Certain types of employment, such as seasonal or project-based work, are ideally suited to fixed-term employment contracts. The primary advantage of a fixed-term contract is that it gives certainty to both parties about when the employment will come to an end. When the contract expires, the employment ends – no mess, no fuss. That’s the theory, anyway. In reality, there exist a variety traps that can quickly ensnare unsuspecting employers. This article shines a light on some of these traps to help employers better manage the risks associated with fixed-term employment.

Trap #1: Is your fixed-term contract really for a fixed term?
From an employee’s perspective, the consequences of finding that an employment contract is for a fixed-term can be serious. In particular, when the term expires, the employees’ employment terminates without any entitlement to notice or pay in lieu of notice under employment standards or common law. For this reason, courts are reluctant to find that an employment contract is for a fixed-term unless the intention to make it such is clearly expressed on its face.

For example, in one case the employment agreement provided that the employee would be employed “for a period of 12 months, commencing July 1, 1996 and terminating on June 30, 1997, unless sooner terminated or extended as hereinafter provided”. The contract further provided that it was “subject to renewal, upon the consent of both parties as to terms and conditions”.

Sounds like a fixed-term contract, right? Not so fast. The Court concluded that the words “subject to renewal” were so closely connected with the language suggesting a fixed term as to make renewals arguably non-optional. This, together with conduct suggesting an indefinite employment relationship, led the Court to conclude that the contract was one of indefinite employment terminable only on reasonable notice. The Court fixed the reasonable notice period at 16 months and awarded damages against the employer accordingly.

The moral here is that courts require unequivocal and explicit language to establish a fixed-term contract, and any ambiguity in this respect will be strictly interpreted against the employer. Special care should be taken to ensure that any renewal provisions are clearly optional, and distinctly separated from the provision(s) specifying a fixed-term.

Trap #2: Renewing fixed-term contracts again and again and again
Employers in certain industries commonly retain their employees pursuant to successive, fixed-term contracts, sometimes for many years. Headcount reductions are then carried out by simply letting the current contracts expire. While attractive from an employer’s perspective, this strategy is not likely to be legally defensible.

In one such case, the employee had worked for the employer for approximately nine years. His employment during this period had been pursuant to 40 appointment letters, each specifying that his employment was for a fixed period. The employer terminated the employee’s employment at the end of the last of these terms without notice or pay in lieu of notice, taking the position that none was required since the governing contract had expired. The employee sued and won, the Court finding that his employment had been indefinite in nature.

Key to the Court’s decision in this case was the employer’s failure to identify the appointment letter as a fixed-term contract using clear and unequivocal language. Also significant were the facts that the employee had not been given an opportunity to negotiate any of the appointment letters and that the employer did not issue a Record of Employment at the end of every term. The employee received damages in the amount of 15 months’ reasonable notice.

The lesson here is that employers should generally avoid retaining long term employees on successive fixed contracts. Even the best-drafted contracts might not hold up where there is evidence suggesting that the parties intended the employment to be indefinite, as was the case here.

Trap #3: Dismissal after a fixed-term contract’s expiration date
An employer who keeps an employee on past the expiration of a fixed-term contract does so at its peril. Employees are entitled to reasonable notice of dismissal unless there is an explicit agreement to the contrary. Fixed-term contracts constitute an explicit agreement ousting the presumption of reasonable notice because both parties have notice of the contract’s termination from the outset. However, if the expiration date comes and goes while the employee continues to be employed, the fixed-term can no longer be relied on to avoid the employer’s obligation to provide reasonable notice of termination.

Some fixed-term contracts specify a different notice period that applies if either party decides to terminate the contract early. Can these early-termination clauses be relied on to limit an employee’s entitlement to notice after the contract expires? At least some courts have said no. In one case, for example, an employee had been employed pursuant to a series of fixed-term contracts, the most recent of which had expired about a year prior to his eventual dismissal. The employer attempted to rely on a clause in the expired contract that it said limited the employee’s notice entitlement to 30 days. The Court rejected this argument, finding that the contract had expired and that the termination clause could therefore no longer be relied on.

To avoid this problem, employers should take extreme care to ensure that a new contract is in place for employees staying on beyond the fixed term. It is also best practice to include an early termination clause which, if properly drafted, might rebut the presumption of reasonable notice if employment continues after the expiration of a fixed term. Such a clause should be relied on only as a last resort, however, and should not be treated as a substitute for ensuring that all fixed-term contracts are duly renewed.

It is important to seek legal advice in this respect prior to rolling out any fixed-term contracts, particularly where there is a chance of employees continuing their employment past the applicable expiration date.

Trap #4: Dismissal during a fixed-term employment contract
Because parties to a fixed-term employment contract expect the employment to begin and end on predetermined dates, damages for early termination are by default calculated with reference to the remaining term. For example, an employee terminated 6 months into a 12-month contract would ordinarily be entitled to damages equal to the remaining 6 months of the contract. This default position can be modified if the contract includes an early termination provision entitling either party to terminate the agreement early upon providing a predetermined amount of notice.

The importance of including an early termination provision is demonstrated in a recent case where an employee was terminated 23 months into a fixed, five-year employment term. The issue before the Court was whether the employee was entitled to damages equal to the remaining duration of the contract or damages equal to common law reasonable notice, which would have been much less. The Court confirmed that the fixed-term agreement ousted the presumption of common law reasonable notice, which resulted in an enormous payment for the dismissed employee far in excess of what would have been ordered as reasonable notice in the usual case.

Early termination provisions are one of the most important provisions in a fixed-term contract because they avoid this risk. Termination provisions must be clearly drafted and should comply with the requirements of employment standards legislation. For more information on the enforceability of termination provisions generally, see Another Successful Effort to Confine Employees to Statutory Minimum Termination Notice/Pay and Employment Contracts Can Limit Employees to a Fixed Sum on Termination.

The principles discussed above are intended to highlight certain trouble spots employers regularly encounter when dealing with fixed-term contracts. This article is not intended to be relied on as legal advice, since the prudent course of action in any case depends on its own unique circumstances. Please do not hesitate to contact any member of our Labour & Employment Group should you have any questions or require any advice.

 

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