Fixed Term Contract – What You Should Know

Fixed Term Contract

Fixed term contracts are employment contracts that specify an end date. The contract states when the employment relationship will begin and on what day the employment relationship will end. There is no need to give notice when ending a fixed term contract, as the employer and employee both already know when the agreement will end. Fixed term contracts are less common than indefinite term contracts.

Advantages of Fixed Term Contract

Fixed term contracts can be advantageous for employers. Ontario employees might use fixed term contracts with the goal of avoiding common law notice or severance obligations that would be required under an ordinary employment contract. 

Fixed term contracts are also particularly useful where an employer wishes to hire a worker only for a short period of time. This might be the case where an employer wishes to replace an employee on leave or wants help on a project with a specific end date. In these situations, it is beneficial to hire a worker for only a specific period of time.  

Ending a Fixed Term Contract Early

Although the contract clearly says when the agreement is supposed to end, a situation might arise where the employer wishes to end the contract early. This is dangerous for the employer but potentially good for the employee. An employer who ends a fixed term contract early could owe the worker a substantial amount of compensation which may even exceed common law notice. 

Where a fixed term contract is terminated early, an employee could be entitled to contractual damages that would put them in the same position they would have been in had the contract been performed. This means the employee may be owed compensation for the entire balance of the term. 

For example, if an employee is terminated six months into a twelve-month fixed term contract, that employee might be owed the remaining six months’ pay. At common law, that same employee would likely be owed significantly less if terminated under a contract of indefinite duration. 

Termination Provisions in Fixed Term Contracts

An employer might try to avoid this outcome by placing a termination provision in the contract that allows them to terminate the contract early. This was the case in Howard v. Benson Group Inc., which was ultimately decided by the Ontario Court of Appeal. In Benson, the fixed term contract contained the following provision: 

“8.1.      Employment may be terminated at any time by the Employer [the defendant] and any amounts paid to the Employee [the plaintiff] shall be in accordance with the Employment Standards Act of Ontario. [sic]”

In the court’s opinion, this termination clause was ambiguous and unenforceable as a result. But what did this finding mean for the employee?

The employee in Benson was terminated 23 months into his fixed term contract. The contract was originally intended to last five years. At the time of his termination, the employee had approximately three years left in his contract. In awarding the employee with the balance of the contract, the Court of Appeal stated: 

“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 term, and that obligation will not be subject to mitigation.”

This reveals that it is possible for a fixed term contract to contain a provision permitting the employer to terminate the agreement early, so long as the provision complies with the Ontario Employment Standards Act, 2000. Where no such provision exists, or where such a provision is unenforceable, the employee should receive the balance of the term.

For this reason, employers must be very careful in drafting such agreements. An employee who has had their fixed term contract ended early should consider speaking with an employment lawyer, as they may be owed very significant compensation. 

Extending or Renewing Fixed Term Contracts

Employers face an additional risk when working with fixed term contracts. It is possible for a fixed term contract to convert into an indefinite-term contract. This occurs where the employee continues working after the contract’s specified end date. When a fixed term contract is converted into an indefinite-term contract, the employee gains entitlement to notice of termination. 

An employer can avoid this outcome by agreeing with the employee to extend or renew the fixed term contract. The key is to ensure the employer does not miss the deadline for doing so. 

Contact an Employment Lawyer about your Fixed Term Contract

If your fixed term contract is ending, you should consider speaking with an employment lawyer to determine your rights and entitlements. It is possible that you have gained entitlement to notice of termination.

This was written by Shane Burton-Stoner, an Employment Lawyer at Monkhouse Law. Monkhouse Law is an employment law firm located in Toronto focusing on workers’ issues. Give us a call at 416-907-9249 or fill out this quick form. We offer a free 30-minute phone consultation.

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