Understanding Fixed-Term Employment Contracts

Most employment contracts continue indefinitely until either the employee resigns or the employer terminates the employment relationship. Under this type of indefinite employment contract, the party who wishes to end the employment relationship is usually required to give the other side advance notice of their intention to do so. We have written about the law of notice in the past. The purpose of this blog post is to review a special type of employment contract, known as a “fixed-term employment contract”, to which the usual rules of notice may not apply.

What is a Fixed-Term Employment Contract?

At the most basic level, a fixed-term employment contract is one that clearly specifies the date on which the employment relationship will end. Fixed-term contracts are generally seen as advantageous for employers because, with an agreed-to date on which the employment relationship will end, the employer may not be required to provide further or additional notice (or pay in lieu) before the contract expires.

However, fixed-term employment contracts can also be advantageous to employees because of the certainty they offer. Unlike an employment contract without an end date that can be terminated with some amount of notice or pay in lieu, an employee working under a fixed-term employment contract may be entitled to compensation for the full duration of the contract if the employer elects to terminate it early.[1] For example, in Covenoho v. Pendylum Ltd., the employer attempted to terminate the employee’s one-year fixed-term contract approximately 12 weeks after it was signed. The Ontario Court of Appeal held that language in the contract permitting the employer to dismiss the employee prior to the fixed-term contract end date was unenforceable and awarded damages equivalent to the full 40 weeks of salary remaining on the contract.

Unlike damages that are awarded for wrongful dismissal under an indefinite term contract, damages awarded for the early termination of a fixed-term contract are not subject to the duty to mitigate, and the court will not deduct what the employee earned or could have earned in another job during the balance of the fixed-term contract.[2]

Fixed-Term-Contracts and the Employment Standards Act

The Employment Standards Act, 2000 (the “ESA”) governs fixed-term contracts in Ontario and specifies when the usual obligation to provide notice of dismissal (or termination pay in lieu) will not apply. Under O. Reg. 288/01 to the ESA, a fixed-term employment contract will only absolve the employer of its obligation to provide advance notice (or pay in lieu) of dismissal if:

1. the employment relationship is not terminated prior to the specified fixed-term end date;
2. the term of the contract is for 12 months or less; and,
3. the term of employment is not extended for more than 3 months beyond the specified fixed-term end date.

If these three conditions are met, the employer can terminate the employment relationship on the specified date without any obligation to provide the notice or termination pay required by the ESA.

Fixed-Term Contracts and the Common Law

In addition to being regulated by the ESA, employment contracts in Ontario are also governed by the common law. The common law also recognizes fixed-term employment contracts as an exception to the usual rule that an employee is entitled to advance notice of their upcoming termination (or pay in lieu).

In certain circumstances, when a fixed-term employment contract expires, an employee may be left with no entitlement to what is commonly referred to as a “severance package” or pay in lieu of advance notice that the contract will end. However, the common law rules governing fixed-term contracts are complex and employees would be well-advised to seek legal counsel before concluding that the fixed-term employment contract they signed means they do not have any entitlements upon dismissal.

First, in order to be enforceable, a fixed-term employment contract must have “unequivocal and explicit language” displacing the usual presumption that the employee is entitled to notice or pay in lieu. Courts will interpret a fixed-term contract in an employee’s favour unless there is absolutely no ambiguity about what specified end date was agreed to. This means that language in the contract contemplating automatic renewal or early termination of the contract could lead a court to override a fixed-term provision and determine that an employee is entitled to common law notice.[3]  

Second, a series of consecutive fixed-term contracts cannot be used to mask what is effectively a long-term, indefinite employment relationship. In Michela v. St. Thomas of Villanova Catholic School, a case litigated by Cavalluzzo LLP lawyers, three teachers were employed by a private school for many years through a series of one-year fixed-term employment contracts. Despite the fixed-term language used by the employer in the teachers’ contracts, the Court held that the “substance” of the relationship was consistent with an indefinite term of employment and the teachers were entitled to pay in lieu of notice. In doing, so, the Court affirmed the following principle:

Employers should not be able to evade the traditional protections of the [Employment Standards Act] and the common law by resorting to the label of 'fixed-term contract' when the underlying reality of the employment relationship is something quite different, namely, continuous service by the employee for many years coupled with verbal representations and conduct on the part of the employer that clearly signal an indefinite-term relationship.[4]

Conclusion

A fixed-term employment contract has both benefits and drawbacks for employees. If you have been offered a fixed-term contract, or your fixed-term contract has expired, you should consider contacting an employment lawyer to discuss your entitlements.

*Special thanks to summer student Kevin Batsinduka for his assistance in drafting this post.