Fixed-term contracts – powerful tools or plagued by pitfalls?

Fixed-term contracts are quite common, both in the workplace and beyond. As the name implies, a fixed-term contract is a contract for a finite period, say 6 months or a year, and which automatically expires at the end of the term. In the employment context, this is often referred to as hiring a "temporary" employee, in contrast to a "permanent" or "indefinite" hire.

Hiring an employee on a fixed-term contract can have its advantages, including when it comes to termination. Whereas permanent or indefinite employees are entitled to common law reasonable notice or severance on termination, fixed-term employees have no such entitlements. If the fixed-term agreement expires and is not renewed, they are not entitled to a notice or a severance package under the common law. This is because both parties agreed at the outset that the employment was finite and thus the employee had no reasonable expectation their employment would continue indefinitely, or they would receive severance at the end.

Pitfalls:

Despite these advantages, fixed-term contracts are not without their pitfalls for employers. Common pitfalls include:

1. Early termination

What happens if the employer wants to terminate the employment early?

Unless the fixed-term contract has an Employment Standards Act compliant and enforceable early termination provision, the employer is prima facie on the hook to pay the employee for the full remainder of the term of the agreement. This amount would not be subject to mitigation. Meaning, the employee would be entitled to the full payout even if they found new work.

This was exemplified in the recent case of Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 4522. In this case, the employee was terminated one year into a three-year fixed-term contract. The employee successfully argued the employer's early termination provision in the contract was not enforceable. Thus, the employee was entitled to damages for the remaining 23 months on the contract, which equalled nearly $1/2 million dollars, and was not subject to mitigation.

2. Failure to properly renew

Another pitfall can arise if the employer fails to renew the fixed-term contract prior to its expiry but permits the employee to continue to work. In this scenario, the employee may be deemed to be a permanent employee. Since there would be no enforceable employment contract in place, in the event the employer subsequently wants to terminate the employee, they may find themselves on the hook to provide the employee with common law reasonable notice entitlements.

3. Inconsistent conduct

Another pitfall can arise where an employee is hired as a "fixed-term" hire, but their contract is repeatedly and consistently renewed over a significant period of time. If challenged, there is a risk the employee may be found to be permanent. That was the case in the recent decision in Wetzel v. Procom Consultants Group Ltd., 2022 ONSC 6056. The employee worked for the employer for over six years, during which time she entered into nine separate fixed-term contracts. The judge concluded that the repeated renewals demonstrated that, in reality, the employee's contract was for an indefinite term, and she was entitled to common law reasonable notice.

4. Inadvertent non-compliance with the Employment Standards Act

A key benefit of fixed-term contracts is the ability to avoid providing the employee with notice or severance at the end of the contract. However, it is important to note that in some cases fixed-term employees may still be entitled to receive advanced notice of termination, or pay in lieu, under the Employment Standards Act. The Employment Standards Act only relieves employers of their obligation to provide notice or pay in lieu thereof if the fixed-term contract is 12 months or less. If the term is longer than 12 months, the employee must receive their statutory termination entitlements.

Employers also can sometimes forget that fixed-term employees are still entitled to most of the protections afforded by the Employment Standards Act, including overtime, vacation, and leaves of absence.

Powerful tools:

Given all these pitfalls, why would anyone want to use fixed-term contracts? Because carefully drafted fixed-term contracts can still be powerful tools to set expectations about the length of employment and limit exposure to liability following the end.

To ensure fixed-term contracts are a tool, rather than pitfall, we recommend the following best practices:

1. Make sure the role is actually fixed-term: Simply put, fixed-term contracts should only be used for truly fixed-term roles. This may include hiring someone temporarily to fill in over a leave of absence or short-term project-based roles.
2. Ensure the temporary nature of the role is clear: Make it clear and unambiguous the role is temporary. This includes in the job posting, during the application/interview process, and in the contract itself. This will help prevent the employee from later arguing they did not realize the role was temporary.
3. Use a well drafted fixed-term contract: Not all fixed-term relationships are going to work out, and it is critical that the contract includes a carefully drafted early termination provision to deal with those scenarios. Otherwise, the employer could be on the hook for a significant payout.
4. Limit renewals: Employers should do their best to estimate how long they may need the employee for and set the term accordingly. In the event a renewal is required, make sure the employee signs and returns the renewal or extension notice before the current term expires.
5. Treat the employee like a fixed-term hire: Avoid making false assurances about job security or length of employment. Keep it clear it is temporary, especially if the term is extended or renewed.

Conclusion:

Fixed-term contracts can be useful tools when used properly. Employers are encouraged to carefully evaluate whether a role is truly meant to be temporary, or not, and seek legal assistance when preparing fixed-term contracts. On the flipside, employees who are asked to sign fixed-term agreements should ensure that it accurately reflects the intended duration of employment, and seek legal advice prior to signing.