Fixed-term employment contracts seem simple enough: a company hires someone for a set period, the contract finishes, and the employment relationship ends. However, in Ontario, fixed-term contracts carry significant legal risks for employers that they may not anticipate. An employer can find themselves owing a departing employee the entire remaining value of the contract if they get a fixed-term contract wrong.
What Is a Fixed-Term Contract?
A fixed-term employment contract is an agreement where employment is set to end on a specific date or upon completion of a specific project. They’re common in sectors like education, healthcare, and tech. They are also often used for leave coverage, project-based work, or seasonal roles. The appeal for employers is obvious: built-in certainty. When the term ends, the employment relationship ends automatically.
Early Termination Without a Proper Clause
If an employer terminates a fixed-term employee before the contract’s end date, and the contract doesn’t contain a clear, enforceable termination clause, Ontario courts will generally award the employee damages equal to the wages they would have earned for the remainder of the term.
This principle flows from basic contract law: the employee was promised compensation through a fixed end date, and breaking that promise without a contractual exit ramp means paying out what was owed.
Example: An employer hires a project manager on a 24-month fixed-term contract at $120,000 per year. Fourteen months in, the project is cancelled and the employer terminates the employee. With no termination clause in the contract, the employer may owe the employee 10 months of salary, roughly $100,000, simply because that’s what remained on the contract.
Compare that to an indefinite-term employee with similar tenure, who might be owed three to four months of reasonable notice.
Why Termination Clauses Often Don’t Save Employers
Ontario courts scrutinize termination clauses carefully, and fixed-term contracts create an additional layer of complexity. A clause that merely provides for “reasonable notice” or references the Employment Standards Act, 2000 minimums may be found insufficient to displace the common law entitlement to the balance of the term.
To be enforceable in a fixed-term context, a termination clause generally needs to:
- Explicitly address early termination of a fixed-term contract.
- Clearly state what the employee will receive if terminated before the end date.
- Comply with (and not contract out of) the ESA minimums.
- Be unambiguous — courts will interpret any uncertainty against the employer.
Language drafted for indefinite employment rarely meets this standard when applied to a fixed-term arrangement.
Renewals: A Hidden Risk
Another overlooked issue is contract renewal. When a fixed-term contract is renewed courts may find that the employment relationship has effectively become indefinite in nature. At that point, the employer loses the benefit of the fixed end date and may face common law reasonable notice obligations instead.
Practical Takeaways
Your company should not use fixed-term contracts as a blanket tool to limit severance exposure. Consider whether an indefinite contract with a well-drafted termination clause is actually simpler and safer. However, if your company does need to use fixed-term contracts, have the termination clause reviewed by employment counsel specifically in that context.
At Bridge Legal & HR Solutions we can help you untangle and understand the web of obligations that applies to your employment relationships. To find out how we can help, contact us through our contact form or call us at 647-794-5442.
