Fixed-Term Contracts: Important but Risky

Calendar

Fixed-term agreements can be a helpful tool for employers in Ontario. If you know that a project will end on a specific date or you have need for a short-term employee within a specific time frame, then a fixed-term contract may be the ideal solution. A fixed-term contract allows the parties to set the end-date of the employment relationship in advance, simplifying the termination process.

However, fixed-term contracts also come with risks. If a fixed-term contract is terminated before the end of the fixed term, and does not contain proper termination clauses, employers may be liable to pay the remainder of the fixed-term contract.

A particularly expensive example of this issue was discussed in McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home) 2019 ONSC 4108. In that case, the employee was constructively dismissed due to a variety of failures by the employer. Unfortunately for the employer, the fixed-term contract was for a period of 10 years and the relationship breakdown occurred during the first year of employment, meaning that unpaid amounts for the entire 10-year term were payable to the employee.

The mistakes in the McGuinty case were clear: the employer did not conduct themselves properly with respect to the employee and, critically, did not have a termination clause in the employment agreement. The employee was therefore entitled to damages amount to $1.2 million.

A Less Alarming Case

In another case, Steele v. The Corporation of the City of Barrie 2022 ONSC 7245, the result reached was the opposite to the McGuinty case. In the Steele case, the employer did have a specific termination clause respecting the end of the fixed-term agreement. During the employee’s fixed term, the employer extended the agreement several times, but in each extension the employer made it consistently clear that the employee was a temporary employee despite the fixed term.

For Justice McCarthy, presiding over the Steele case, it was a combination of what the employer did and what the employee did that were determinative. Each fixed-term extension contained language stating that employment was “temporary” and, although not ideally drafted, the court found that the understanding of the temporary nature of the employment relationship was clear between the parties.

Both parties acted as if the relationship was a temporary relationship. On part of the employee, the court took specific notice of the following:

  • He never raised the issue of why his contract ended and had to be extended in the first place.
  • He never posed the question why his employment was not extended following the decision not to extend the contract into 2018.
  • He did not protest to the final email received in 2017 which told him that temporary employment is coming to an end, instead expressing his gratitude and well wishes to his former manager.
  • He attended a lunch session to mark the occasion of the end of his term of employment.
  • He did not contact the City of Barrie for an explanation or a demand of severance payment.

Meanwhile, Justice McCarthy also considered the following facts (at Para 16):

  • The job posting under which the position was offered and in response to which the Plaintiff applied for the employment clearly described the position as a temporary.
  • That same job posting provided that the position was for “2 years approximately.
  • The fact that extensions were granted before the end of the respective term serves as compelling proof that absent those extensions, the employment term would have expired.
  • Renewal and extension of the employment contract may have resulted in the employment being continuous for 3.5 years, but that was pre-destined neither by the employment contract nor the words or conduct of the City of Barrie.
  • Both the original employment letter and the respective extension notices confirm that the Plaintiff’s employment was “temporary”.
  • The extension letters all provide a date “up to” which the employment would run. Thus, if there was any ambiguity in the employment letter, which I do not accept, then it should have been resolved by the extension notices.

In addition, Justice McCarthy preferred the overall evidence and credibility of the City of Barrie witnesses as opposed to the employee’s testimony. Taking all the above into account, the Justice found that the employment term was fixed term and that, therefore, there was no termination pay payable to the employee.

Takeaways

The key takeaways for Ontario employers are clear:

  • Fixed-term contracts should only be used in circumstances where the employment relationship is clearly temporary.
  • Fixed-term contracts should not be used as a substitute for a probationary period where the employer is expecting that the relationship will be an indefinite one once fit, and performance are determined.
  • Key terms of any fixed-term contract must be clear and unambiguous, especially with respect to termination provisions, to avoid misunderstandings and potential liability for the total duration of the contract if terminated early.
  • Employers should conduct themselves in a manner that is consistent with a temporary relationship, avoid use of words such as ongoing, continuing, permanent, etc. when handling fixed-term employment relationships.

At Bridge Legal & HR Solutions, we provide expertise for employers of all sizes. Call us today at (647) 794-5442 for all your employment law and workplace investigation needs.

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