In the recent decision in Howard v. Benson Group Inc., 2016 ONCA 256, the Ontario Court of Appeal provides straightforward but important lessons for employers who make use of fixed term employment contracts:

  1. Parties to a fixed term employment contract can specifically provide for what severance, if any, the employee will be entitled to upon early termination by the employer;
  2. If the employer intends to eliminate or limit its severance obligation to the employee, the employer must clearly state this intention in the contract;
  3. If the employer intends that the employee will have a duty to mitigate, the employer must clearly state this in the contract; and
  4. If the termination provision is too ambiguous or vague to be enforceable, the employee will be entitled to payment for the unexpired term of the contract with no duty to mitigate – unless mitigation is expressly mandated in the contract.

Background

The appellant, Mr. Howard, was employed in a managerial role with the respondent, Benson Group Inc., an automotive service centre. Mr. Howard had signed a written employment contract with a five-year term. Benson Group terminated Mr. Howard’s employment, without alleging cause, after 23 months.

Mr. Howard brought an action for breach of contract; claiming he was entitled to more than 3 years’ salary as damages. On a motion for summary judgment, Mr. Howard was instead awarded common law damages for wrongful dismissal, subject to mitigation, to be assessed at a mini trial. Mr. Howard appealed the decision of the motions judge.

The Court of Appeal considered the following questions in their review of the lower court’s decision:

  1. Is a discharged employee under a fixed term contract, which does not provide for early termination without cause, entitled to payment for the unexpired portion of the contract?
  2. Is the employee required to mitigate his damages following termination?

The Court held that a discharged employee is entitled to payment for the unexpired portion of the contract on early termination, where the contract does not contain an enforceable provision stipulating a specified period of notice (or pay in lieu) for early termination.

Further, the Court held that an employee employed pursuant to a fixed term employment contract is not required to mitigate his damages following early termination unless the contract expressly mandates mitigation.

The Court accordingly found that Mr. Howard was entitled to the equivalent of more than 3 years’ salary as damages, or approximately $180,000. This is a significant damages award, and clearly not a result the employer would have contemplated when it entered into a fixed term employment contract.

Key Takeaways:

Fixed term employment contracts continue to be an effective way for employers to limit their obligations in a termination context. But, apposite drafting is needed to accomplish this.

We strongly recommend that employers seek legal advice when preparing fixed term employment contracts for new hires.

Employers should also review, and consider revising, their existing fixed term employment contracts – remembering that new consideration needs to be provided in exchange for agreeing to different terms. We also recommend seeking legal advice to assist with this.