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Bulletin | The HR Space

Fixed Term Contracts: Friend or Foe?

Fasken
Reading Time 3 minute read
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Labour, Employment and Human Rights Bulletin | The HR Space

The requirement for an employee to mitigate his or her damages following termination is generally helpful for employers during wrongful dismissal litigation, but this may not be the case when it comes to fixed term employees.

Employers use fixed term contracts for various business reasons: projects to take place over a fixed time; summer student and internship positions; the ease of simply allowing the contract to expire without the requirement to provide notice; or executives may be considered term employees if their agreements are drafted to align with a directorship appointment. These kinds of contracts have their benefits, but they also come with some potential disadvantages.

What happens when it becomes clear that a contract employee is not working out, business realities change, or down-sizing must occur? If a contract employee is terminated without cause before the end of the term, what notice is an employer required to give and is the employee required to mitigate?

Ordinarily, an employee whose employment is terminated is entitled to common law reasonable notice (unless an enforceable contractual termination provision provides otherwise), and is required to mitigate his or her damages by seeking alternative employment as soon as possible. This, however, is not the case for fixed term employees, according to the Ontario Court of Appeal in Howard v. Benson Group Inc, 2016 ONCA 256 (PDF) (leave to appeal to the Supreme Court denied, [2016] SCCA No. 240).

The employee in Howard v. Benson Group Inc. was party to a fixed term employment agreement for a term of five years. The employer terminated his contract three years into the term and provided him with the statutory minimum, purporting to comply with a term in the employment agreement which stated that his "Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario."

The motions judge found that this provision was unenforceable, as the termination provision did not sufficiently limit the employee's notice entitlement to the minimum standards set out in the ESA. The motions judge then ordered a mini-trial take place as to the appropriate amount of reasonable notice, and found that the employee had a duty to mitigate. The employee appealed this finding.

On appeal, the Ontario Court of Appeal found that a provision allowing for the automatic termination at the end of the contract term ousts the implied term that reasonable notice must be given for termination without cause. The court concluded that the employee was entitled to the compensation that he would have earned to the end of the fixed term set out in the employment agreement. 

On the subject of mitigation, the court disagreed with the motions judge and found that the employee was not required to mitigate his damages. The court explained that the provision for a fixed term amounts to contracting out of the common law. On that basis, it concluded that in the absence of an enforceable contractual provision providing otherwise, a fixed term employment contract obligates an employer to pay an employee to the end of the term without any duty to mitigate on the part of the employee.

In sum, employers who wish to use fixed term employment agreements should ensure that they have airtight early termination provisions in their contracts and consider specifically obligating the employee to mitigate. If they do not have any termination clauses or if such clauses are found to be invalid or inoperable, they may be on the hook to pay out the remainder of that employee's term, with no obligation on the employee to seek alternative employment.

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