Fixed-term employment contracts often seem like a valuable tool for employers. When used appropriately, employers are able to employ individuals for finite periods and then terminate the relationship with little to no severance-related liability. However, as the Ontario Court of Appeal in Howard v. Benson Group Inc. (The Benson Group Inc.) recently reaffirmed, a fixed-term employment contract may result in concealed (and costly) liabilities.

The Facts

In September 2012, pursuant to a written employment contract with a 5 year term, Mr. Howard commenced employment with The Benson Group Inc. (Benson) at an automotive service centre. Among other things, the employment contract provided:

Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.

After approximately 23 months of employment, Benson terminated Mr. Howard’s employment without cause. Mr. Howard brought an action for wrongful dismissal and breach of contract, claiming he was entitled to the compensation that he would have received during the remaining term of his employment contract (more than 3 years).

At the motion for summary judgment, the employer argued that its liability was limited to the minimum notice required under the Employment Standards Act (ESA)(which in this case was 2 weeks of notice or pay in lieu of notice). However, Justice MacKenzie found that the language used was “sufficiently ambiguous” and held that the clause was unenforceable.

Curiously, instead of finding that damages be assessed based on the unexpired remainder of the term, Justice MacKenzie imported an implied term of common law “reasonable notice”. Although Mr. Howard appealed before the damages were assessed, his relatively short service made it likely that he would have received far less than the 3 years’ salary he was claiming.

The Appeal

Interestingly, the finding that the termination language in the employment agreement was ambiguous was not appealed. Instead, the Court of Appeal was asked by Mr. Howard to consider whether or not the motions judge erred in finding that:

  1. Benson was liable for damages according to the common law of reasonable notice rather than damages for the unexpired portion of the term; and/or
  2. an award of damages for early termination of the fixed-term employment contract was subject to the duty to mitigate.

Damages for Termination of a Fixed-Term Contract

In finding that the motion judge erred in implying a term of reasonable notice, Justice Miller held that, where an employment agreement unambiguously provides for a fixed term, the common law presumption of reasonable notice is ousted. Moreover, if the parties do not adequately specify a pre-determined notice period, they will be considered to have agreed to a notice period equal to the unexpired portion of the fixed-term contract.

Since the finding that the termination provision was unenforceable remained undisturbed, Justice Miller awarded Mr. Howard an amount equal to his salary and benefits for 37 months (the unexpired term of the employment contract).

Fixed-Term Contracts and the Duty to Mitigate

Relying on the Court’s previous decision in Bowes v. Goss Power Products Ltd., Justice Miller reaffirmed that a contractually fixed term of notice is distinguishable from common law reasonable notice in that it should be treated as fixing liquidated damages or a contractual amount.

Noting that it would be unfair to permit an employer to bargain for fixed damages and then compel an employee to reduce those damages through mitigation, Justice Miller held that, unlike common law damages, damages incurred for early termination of a fixed-term employment contract are not subject to an implied obligation to mitigate. Consequently, since there was no express requirement to mitigate imposed on Mr. Howard, there was no obligation on Mr. Howard to mitigate his damages.

Takeaway for Employers

Employers should keep the following in mind when deciding whether or not a fixed-term contract is suitable:

  1. Severance Obligations in Fixed-Term Contracts. An employer who wants to limit its early-termination obligations for fixed-term contracts must include a termination provision which clearly states the intended consequences of termination prior to the expiry of the fixed term. Such termination provision must comply with the employer’s minimum obligations contained in the ESA. Failure to include an enforceable termination provision could result in the employee being entitled to compensation for the unexpired portion of the contract.
  2. Duty to Mitigate. Unlike wrongful dismissal damages, employees under a fixed-term contract do not have an implied obligation to mitigate their damages. If an employer wants to impose a duty upon the employee to mitigate their damages, it must be expressly stated in the contract.