Fixed term employment contracts can be useful. Employers can hire an employee for a specific period of time (like a maternity leave) or for a project with a set end date. But, fixed term contracts need to be carefully drafted and administered or employers can face significant liability. A recent court decision reminds employers of the dangers of terminating fixed term contracts during the term where there is no early termination provision.

The Facts

The employee sold his business and entered into an agreement to provide transitional management services to the new owner of the business over a fixed term of 10 years. The agreement did not contain any provisions allowing for early termination.

Despite a positive start to the term, difficulties quickly arose between the employee and the new owners. Over a few months within the first year of the agreement, the new owners: (i) terminated the employee’s use of a company vehicle; (ii) recruited a more junior employee to track the employee’s time at the business; (iii) refused to pay the employee certain commissions that he was entitled to; (iv) removed his photograph from the premises; and, (v) changed the locks to the business.

After 11 months, the employee commenced a medical leave of absence due to workplace stress, which he attributed to the new owners. The employee remained on an unpaid medical leave for two years without any communication with the new owners. He then commenced legal action. It was only when he commenced legal action that he claimed that he had been constructively dismissed and sought payment for the two years he was unpaid and the remaining balance of the contract.

What Did the Court Say?

Ultimately, the court decided that the employee had been constructively dismissed. Even though he had not claimed that he had been constructively dismissed until two years after he left the workplace, the court said that the new owners’ actions would lead a reasonable person in the employee’s position to conclude they no longer intended to be bound by the agreement. As a result, the agreement had been terminated.

Citing the decision of the Ontario Court of Appeal in Howard v Benson Group Inc.[1] (which we previously wrote about here), the Court noted that an employer who terminates a fixed term contact is liable to pay the employee to the end of the term, if the contract lacks an enforceable contractual provision setting out a fixed term of notice, without any obligation that the employee mitigate their damages. The Court confirmed that the employee was entitled to the compensation and benefits that he would have received had the contract not been terminated early.

Accordingly, the Court awarded the employee approximately $1.27 million representing the base salary, use of the company vehicle, benefits, commissions, and other entitlements that he would have received in the nine years remaining in the term.

Take Away for Employers

While fixed term contracts do have certain benefits, employers in Canada should think carefully about whether it is worth taking on the risks associated with a fixed term contract – and, in particular, a lengthy term. Employers making use of fixed term contracts should ensure that those contracts include strong termination clauses allowing for early termination. The contracts should also have a clause requiring the employee to mitigate their damages if the contract is terminated early. Without these protections employers may find themselves paying out significant amounts to former employees.