Fixed Term Employment Contract and Damages on Termination

fixed term employment contract reviewGiven the current economic climate, hiring employees with fixed term employment contracts may appear quite appealing because business needs may change by the end of the term. However, it is important to remember that if the contract is terminated early, it may entitle employees to contractual damages that would put them in the same situation they would have been had the contract been performed.

Fixed Term Employment with Automatic Renewal Clause

In the case of Lee v. Choice Bank Limited, the employer had to pay 52 weeks worth of pay as contractual damages for the termination of a fixed-term contract.

Lee was an employee who entered a fixed term contract with the Defendant, Choice Bank Limited (“CBL”).  The contract stated that after a three-year term, the contract would be automatically renewed on a yearly basis unless either party provided no less than 30 days’ notice prior to the end of the fixed term contract. CBL terminated Lee without cause, providing her with a measly 8 days notice prior to the conclusion of the term.

It was the Plaintiff’s position that she had been wrongfully dismissed in that, she was not provided with a reasonable amount of notice as her employment was automatically renewed prior to the termination date. This position was upheld by the court and eventually the court of appeal who further emphasized the importance of clear and unambiguous language within a termination clause.

Failed to Provide Notice of Termination

Unlike an indefinite employment contract, when a fixed-term contract is terminated, the employee is entitled to damages for the unexpired term unless the parties agree otherwise. Where there are years remaining on that term, these damages can be exceptionally large.

The benefit of including an automatic renewal is that it can limit the amount of damages owed if an employee is terminated later in the contract. However, in the Lee case, by failing to provide the appropriate amount of notice and the fixed-term contract renewed, and the employer was liable for an entirely new term. If the employer is not mindful of the upcoming deadlines, they can miss the opportunity to opt-out of the deadline which will allow for another term of continued employment.

The court did take a look at the language of the agreement to understand at which point did the contract renew. The court held that there was no ambiguity in the agreement as in section 2, it is stated that the agreement would renew unless written notice of non-renewal was provided which is had not been.

Section 2 states:

This Agreement shall automatically renew and continue to remain in effect after the Initial Employment Period for successive one year periods (each, a “Renewal Employment Period”), until terminated as provided herein, unless either party provides the other party with written notice of non-renewal not later than 30 days prior to the expiration of the Initial Period or the anniversary of such date in any subsequent Renewal Employment Period.

Fixed Term Termination Clause

In order for an early termination clause to be useful to the employer, it must legally limit the employees’ entitlement to less than what the employee would have received if there was no termination clause at all but no less than that of the Employment Standards Act (“ESA”) minimums.

The termination clause within the Lee contract was drafted in such a way that it provided Lee with a generous severance package in the event she was terminated early in the original or renewed term.

Specifically, section 10 states:

Severance. In the event that the Employees’ employment is terminated by the Company … the Company shall continue to pay the Employees the Base Salary for a period of 36 months following the date of termination and shall also pay the Employees a lump sum amount equal to the Performance Bonus paid (or payable) in connection with the most recently completed year, multiplied by the number of years, in whole or in part, that remains in the Employment Period, provided, however, that the length of time during which the Company is obligated to make the payments of Base Salary described in this Section 9 [sic] shall in no event exceed the length of time remaining in the Employment Period (whether the Initial Employment Period or a Renewal Period, as applicable) as of the date of termination of the Employee’s employment by the Company.

Since Lee was terminated 8 days prior to the end of her term and her fixed-term contract had already renewed, technically Lee was entitled to 8 days plus 52 weeks of notice inclusive of her Performance Bonus based on the one year.

Takeaways For Employees

It is important to understand your rights when it comes to fixed-term employment contracts and your basic entitlement under the ESA. There are instances where an employee has multiple fixed-term contracts over multiple years in which a judge may consider you an indefinite employee based on the employment relationship and provide you with common law notice.

Understanding that the interpretation of language within your fixed-term employment contract is important. Reach out to an employment lawyer at Monkhouse Law if you are unsure of what your entitlements may as they have the expertise to guide you in your employment disputes.

Give us a call if you have any questions about your fixed-term employment contract. We offer a free 30 minute phone consultation.

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