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The $80,000 Mistake: Fixed-Term Employment Contracts

Fixed-term employment contracts are very common in today’s workplace. Employers typically use them for a variety of reasons: to cover employee leaves of absence, or where the employee is only required for a short period of time. This type of contract if often viewed as a perfect solution by employers who want to ensure an employee is suitable and to avoid the extra duties and obligations that come with an indefinite-term employee. For example, if an employer wants to avoid paying an employee reasonable common law notice at the end of their tenure, a well drafted fixed-term contract can do just that.

The problem with fixed-term contracts is that they only appear to be a simple solution. In reality, they can be far more costly for an employer (if not prepared well).

Take, for example, the situation of a recent client, Company X.  Company X needed a temporary employee to cover an extended maternity leave and thus hired Ms. A on a fixed-term basis for 20 months.  The contract was a simple offer letter with a start date, an end date and a salary.  However, several months into the contract, Company X decided that Ms. A was not a good fit and terminated her employment. Company X paid Ms. A one weeks’ termination pay pursuant to the Employment Standards Act, 2000.  Within a month, Ms. A had found an alternative job yet advanced an action against Company X for payment of the balance of the fixed term.

Unfortunately for Company X, a recent Court of Appeal decision has made it clear that when there is no early termination provision in a term contract, an employer is required to pay out the balance of the employee’s term, without there being any obligation on the employee to “mitigate” by finding alternative employment.  In other words, Ms. A was entitled to receive a salary from her alternative employment while also receiving a salary from Company X during the remaining 16-month in the contract without any reduction on account of the wages she was earning with her new employer.  The impact to Company X amounted to over $80,000.00.

Company X’s expensive mistake could have been avoided with a well-drafted fixed-term employment agreement, which would include:

  • A precise clause specifically allowing for early termination in without cause situations (i.e. where the employee has not seriously breached the employer’s trust).
  • Clearly defining the amount of notice or pay in lieu of notice that will be provided should the contract be terminated early.

Company X ultimately took on a greater risk with a poorly drafted fixed-term agreement than if it had simply employed Ms. A indefinitely and paid Ms. A reasonable common law notice on termination—which would only have been several weeks’ worth of salary.

Before you hire a fixed-term employee on the assumption that it will be simpler and cheaper, talk to us about your options so you don’t make your own $80,000 mistake.