To manage expectations, employers often hire temporary workers under a “fixed-term contract”.  But including an end date in the employment agreement can have serious, unintended consequences. The following overview will help you ensure your organization does not fall victim to the pitfalls that are associated with fixed-term contracts.

Fixed-Term Contracts: The Key Issues

  • A fixed-term employee who is dismissed before his or her contract expires is generally entitled to the remuneration that would have been received if they had worked until the contract’s end date.  To overcome this general rule, employers must include an enforceable “early termination clause”.
  • Courts require clear and unequivocal language before determining that an employment agreement is actually a fixed-term contract.  If fixed-term language is unclear, an employee may be entitled to “reasonable notice of termination” at common law.
  • An employee who is retained on a series of fixed-term contracts may be considered by a court to be an indefinite employee, regardless of the language of the employment agreement. If so, the employer will be required to provide all of the entitlements it sought to avoid in the first place.
  • If an employee works beyond the end date without having a new contract in place, whether intentionally or inadvertently, the employment relationship may be considered indefinite, and the employee may become entitled to reasonable notice of termination.

Best Practices

Generally speaking, employers who use fixed-term contracts can better minimize their risk of damages by offering indefinite employment contracts that limit entitlements upon termination. By exercising this option, employers have more certainty with respect to their liability, and are free to dismiss employees as business needs change (subject to termination notice requirements which can be limited to statutory entitlements).

Fixed-term contracts may be appropriate in situations where there is a definite and logical end to the employment relationship, such as for employees who cover statutory leaves of absence, carry out time-limited projects or work only during historically busy periods of the year.  If a fixed-term contract is implemented, additional care should be taken in drafting the the employment agreement to maximize flexibility and mitigate risk.  In particular:

  • Employers should avoid implementing a series of successive, fixed term contracts.
  • Fixed-term contracts should always provide for early termination to avoid a situation where an individual is dismissed early but nevertheless entitled to be paid for the remainder of the fixed-term.
  • Early termination clauses must be carefully drafted to ensure they are enforceable and not in breach of legislation.
  • Fixed-term contracts should not include automatic renewal provisions.
  • The entire contract — not just the term and termination provisions — should be consistent with the fixed-term.  For example, fixed-term contracts should not contemplate benefits entitlements that are only available to permanent employees.

In any event, retaining legal counsel to draft your employment agreements — whether fixed-term or indefinite — is a very good investment.  In fact, it is one of the most cost-effective ways to manage your orgnization’s employment liability.