4 Common Mistakes to Avoid with Fixed-Term Contracts

4 Common Mistakes to Avoid with Fixed-Term ContractsFixed-term or temporary employment contracts can be a useful tool for short-term employment such as temporary replacements for employees on leave, co-op students or employees performing work funded by a time-limited grant. When drafted and executed correctly, employment ends at the end of the fixed-term contract and no further termination entitlements are owed. 

However, when fixed-term contracts are misused, they can become very risky for employers. Below are four mistakes for employers to avoid when hiring on a fixed-term contract.

1. Trying to contract out of the ESA

Under the Employment Standards Act, 2000 (“ESA”), fixed-term employees are not entitled to notice on termination unless: (a) the employment terminates before the expiry of the term; (b) the fixed-term expires more than 12 months after the employment commences or (c) the term is extended more than 90 days beyond the original term. 

Otherwise, fixed-term employees remain entitled to most of the minimum statutory protections provided to permanent employees, such as minimum wage, vacation, overtime, and public holidays. Note that some entitlements, such as vacation, require a certain period of employment before the entitlement arises. The same qualification requirements apply to temporary or fixed-term employees. 

2. Not giving enough termination pay on an early termination

If the employer terminates the contract early, the employee is entitled to compensation for the remainder of the contract unless the contract properly specifies otherwise. Absent an enforceable early termination clause, the employee is entitled to liquidated damages for the remaining period of the contract. 

The damages are not subject to mitigation, meaning the employee is not required to try to find comparable employment to reduce the damages incurred as a result of the early termination. This can come as an unpleasant surprise to employers. 

McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home), 2019 ONSC 4108 (upheld on appeal) provides a particularly poignant illustration of this risk. In McGuinty, the owner of a funeral home sold the business and entered into a fixed-term agreement to remain with the business as General Manager for a period of 10 years. One year into the contract, the employee claimed he was constructively dismissed. There was no enforceable early termination provision in his contract. The claim was successful and he was awarded damages for the remaining 9 years of his full contract entitlements, including loss of pay, commission, group benefits, the loss of his company vehicle and gas coverage, and his golf membership. The award totalled  $1,274,173.83 plus legal costs (!!!).

3. Letting a fixed-term contract roll into permanent employment

If an employee works past the end date of the fixed-term contract, the contract will generally convert into an indefinite-term contract. Sometimes it is difficult to estimate the exact timeline for a fixed-term project, and an employee on a fixed-term contract is needed beyond the established end date. However, if the employee simply continues to work without agreement or discussion regarding a new end date, the contract will convert to an indefinite-term contract. 

In other words, the employee will become entitled to common law reasonable notice of termination, regardless of any termination terms set out in the contract.

4. Renewing fixed-term contracts too many times 

So, what do employers do if the work is not yet complete but the contract termination date is coming up? The contract may be renewed, however, renewals should be executed carefully. On termination, a court will scrutinize fixed-term contracts to identify the true nature of the relationship and if they find the relationship is, in fact, indefinite, the termination provision will be invalidated and the employee will become entitled to common law reasonable notice. 

Continuously renewing back-to-back fixed-term contracts is often an indicator that the relationship is, in fact, permanent. Similarly, including language indicating the term may be extended subject to regular review, or any other indications regarding extensions, creates ambiguity as to the length of the term. 

Takeaways for employers considering fixed-term contracts

  • Fixed-term  contracts are appropriate for work that is truly temporary in nature, such as coverage for leaves, project-based work, or to help transition a business after a sale
  • Include a termination clause in the fixed-term contract that provides at least the statutory minimum entitlements to contain liability in the case of early termination
  • If an employee works past the end date of a fixed-term contract, they will be deemed a permanent employee at common law
  • Extending a fixed-term contract numerous times also risks a finding of permanent employment

If you have questions about any fixed-term employees you currently have or are looking to hire, get in touch for a consultation.

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