Fixed Term Employment Contracts and Early Termination

The Ontario Court of Appeal has now ruled on the damages an employer owes to an employee upon early termination by the employer of a fixed term contract where the contract does not contain an early termination clause --- the employee is entitled to all wages and benefits to the end of the term of the contract.

Fixed term employment contracts are often entered into for the purpose of obtaining certainty and permitting the employment contract to automatically come to an end at the expiration of the contract term without the employer owing anything further to the employee.

In 2015 the Superior Court held in Howard v. Benson Group Inc.[1] that because an early termination provision in a fixed term contract was voided[2], the employee was entitled to common law reasonable notice with a duty to mitigate and not entitled to wages and benefits to the end of the contract. However, recently the Ontario Court of Appeal[3] overturned that decision finding that the fixed term contract without an early termination provision still provides the employee with the right to claim all wages and benefits owing to the end of the 5-year contract when the employer chose to terminate the contract early. As well, the employer had no duty to mitigate.

General Rules Concerning Termination of Employment Contracts:

 

Employment Contract
 for indefinite term

Fixed Term Contract

Employer’s obligation at end of Contract

The common law presumption applies that every employment contract includes an implied term that the employer must provide reasonable notice on termination.[4]

Contract ends automatically with no obligation on employer to provide notice or payment in lieu of notice.[5]

Early Termination Clause in Contract (and employer terminates employment without cause)

If the contract clearly specifies that the employee is to receive some other period of notice or pay in lieu thereof, then unless the clause is voidable for some reason, the employer is obligated to provide the employee the notice as set out in the contract.[6]

If the contract fails to provide an early termination clause with a pre-determined notice period, then the employee is entitled to receive all wages and benefits to the end of the term of the fixed term contract.[7]

Is there a duty to mitigate a pre-determined notice period set out in the employment contract?

Employee only has a duty to mitigate if there is a clause in the employment agreement (indefinite contract or fixed contract) that specifically states that the employer has a duty to mitigate.[8]

Points to Ponder

When preparing employment contracts parties should consider whether or not to include an early termination provision that limits the amount owed to the employee should the employer wish to terminate the contract. Should the employer wish to create an obligation that any such amount is subject to mitigation, then the requirement must be specifically specified.

Employers should review their employment contract templates from time to time as employment law is constantly changing. The last few years have rendered many termination clauses ambiguous and voidable by the court. We at D&L would be happy to review your existing employment contracts or assist you in creating a contract which is binding under current law.

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Christina J. Wallis is a Partner practising civil litigation with a focus in Employment Law at Dale & Lessmann LLP, Toronto, Ontario, Canada, a full service business law firm. To speak to Christina please call 416-369-7832 or send an email message to her at mailto:cwallis@dalelessmann.com.

[1] 2015 ONSC 2638 (CanLII).

[2] Clause 8.1 was voided by the court as the clause referred to the employee being entitled to “amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario [sic]” which does not refer to entitlement to benefits under the said Act.

[3] Howard v. Benson Group Inc., 2016 ONCA 256 (CanLII).

[4] Ibid at para 20 relying upon Bowes v. Goss Power Products Ltd., 2012 ONCA 425 (CanLII) at para 23.

[5] Ibid at para 21.

[6] Ibid at para 20 relying upon Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, at 998; Ceccol v. Ontario Gymnastic Federation (2001), 2001 CanLII 8589 (ON CA), 55 O.R. (3d) 614 (C.A.), at para 45.

[7] Ibid at para 22 relying upon Lovely v. Prestige Travel Ltd., 2013, ABQB 467 (CanLII), at para 136; Bowes, at para 26; Canadian Ice Machine Co. v. Sinclair, 1955 CanLII 44 (SCC), [1955] S.C.R. 777, at 786.

[8] Ibid at para 44; note that an employee has no duty to mitigate any amount received in accordance with the Employment Standards Act, 2000.