It is well known in employment law that a dismissed employee has a duty to mitigate any common law notice losses by seeking comparable employment. Put simply, if the employee finds a new job during the notice period, any money earned with their new employer reduces the damages that can be recovered from their former employer as a result of a wrongful dismissal.
However, this may not be the case for fixed term employees. Generally, without an enforceable early termination clause, where an employer terminates a fixed term agreement prior to the end of the term, the employee is entitled to the compensation that they would have earned up to the end of the fixed term, regardless of any mitigation. This has led to employers finding themselves paying out significant amounts to former employees including in McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home) (which we previously wrote about here), where the court awarded the employee $1.27 million representing the compensation he would have received in the nine years remaining in the term.
But what about independent contractors on fixed term agreements?
A recent decision from the Ontario Court of Appeal highlights some key differences, but similar perils where fixed term agreements are in place.
Metro Freightliner (the “Company”) hired Antonio Monterosso as an independent contractor with a 72-month fixed term agreement. However, only seven months into the agreement, the Company terminated his services on a “without cause” basis. As a result, the worker filed a claim seeking payment for the remaining 65 months of the fixed term agreement.
At trial, the judge found that the agreement did not contain an enforceable termination provision and that it clearly and unambiguously provided for a 72-month fixed term. The judge ruled, therefore, that the worker was not required to mitigate his damages i.e., look for replacement work. Ultimately, the trial judge awarded him $552,500 plus HST representing the value of the remaining monthly payments due under the agreement.
On appeal, the Company’s primary argument was that the trial judge erred in holding that the worker was not required to mitigate his damages.
The Court of Appeal accepted this submission and noted that the trial judge had conflated and mixed-up the situation of independent contractors with that of employees working under fixed-term contracts.
The Ontario Court of Appeal looked back at one of its prior decisions in Howard v Benson Group Inc. (which we previously wrote about here), and noted that this decision established that employees under fixed-term contracts are entitled to damages equivalent to the loss of pay for the remaining term without a duty to mitigate, but did not firmly establish whether independent contractors have a similar duty.
In explaining its rationale, the Court noted that nothing in this particular case takes it outside the normal circumstances in which mitigation is required. Namely, the Court noted that:
- the worker was not in an exclusive, employee-like relationship with the Company;
- the worker was not “dependent” on the Company; and
- the terms of the contract allowed the worker to perform services for other parties.
However, and unfortunately for the Company, the Court also concluded that while the worker had a duty to mitigate his damages, he did not fail to do so. He filed extensive evidence detailing his unsuccessful job search efforts, whereas the Company led no evidence to establish that there were jobs he could have taken. Therefore, the end result for the company was the same, as it did not meet its evidentiary burden of proving that the worker did not take reasonable to mitigate his damages.
This decision is yet another reminder that early termination of a fixed term agreement can trigger significant liability for a business. This is particularly true where the worker is an employee, but can also be true if the worker was an independent contractor, if the company is unable to show that the worker failed to mitigate. The proper classification of workers (as either employees or independent contractors) is therefore even more important than it ever was before. This is because independent contractors will have a duty to mitigate, whereas without clear language to the contrary, employees will not.
In order to avoid disputes such as this one, employers should consider whether a contract of indefinite duration is a viable option before hiring an employee or retaining the services of an independent contractor on a fixed term basis. While appealing, fixed term agreements carry significant risks, outlined above.
If ultimately a fixed-term contract is the right solution for hiring, then careful consideration should be put into:
- a clear and unambiguous termination clause that allows for the termination of the relationship prior to the end of the term; and
- mitigation language.
Lastly, to minimize liability if all else fails, the term of any such fixed term agreement should be kept as short as reasonably necessary to avoid having to compensate the terminated worker for months or even years to come.