We often see issues with fixed term contracts that lead to exposure to damages that employers were not anticipating. This blog post will highlight two key misconceptions about fixed term contracts.
Misconception #1: Notice or pay in lieu is never owed when the employee is terminated at the end of their fixed term.
In fact, Regulation 288/01 under the Employment Standards Act (“ESA”) requires notice to be paid for fixed term employees if the term of the contract is greater than 12 months or if the term of the contract has been extended by 90 or more days beyond the original end date.
Misconception #2: You do not need a termination provision in a fixed term contract.
Including a termination provision in a fixed term contract (and any employment contract) is always a good idea. It can help you avoid the following situations:
- There are many reasons why a fixed term employee might be terminated prior to the end of their term. There might be performance issues. Funding for the position might expire. The project for which the employee was hired is completed early. Without a termination provision in the contract, the employer could be liable to pay the employee to the end of their term. This could present a significant liability for a short service employee.
- There are often circumstances where employers try to disguise an indefinite employee as a fixed term employee. This is done by continually renewing a fixed term contract. There might be the expectation on the part of the employer that by structuring the contract in this way, the employee can be terminated at the end of a term without providing notice.
As already mentioned, Regulation 288/01 would mandate that the employee be entitled to notice or pay in lieu if the term was extended by more than 90 days. However, after a certain number of contract renewals, the employment relationship will be construed as an indefinite employment relationship and not a fixed term relationship. This was the case in the 2001 Ontario Court of Appeal decision in Ceccol v. Ontario Gymnastic Federation. In that case, an employee’s one-year contract was renewed 15 times. The Court held that the Plaintiff was an indefinite employee. As there was no termination provision in the contract, the Plaintiff was entitled to common law notice based on 16 years of service. This presented a far greater liability to the employer then they originally expected when they decided to not renew the Plaintiff’s contract for a 16th time.
Fixed term contracts are a good idea when you have a reasonable reason for using one. However, even when using a fixed term contract in the appropriate situations, including a termination provision is always important to protect employers from unanticipated liabilities in the event of a termination.