Positive News from the Court of Appeal on Fixed-Term Contracts

Positive News from the Court of Appeal on Fixed-Term Contracts

Author: Tom Finlay; April 14, 2016

What is an employee subject to a fixed term employment contract entitled to if the contract is terminated before the end of that fixed term?

If the contract provides an express provision allowing for an early termination of the contract, then that provision will govern what the employee will receive.

However, what if the contract doesn’t contain an express term allowing the employer to terminate the contract before the end of the fixed term or a Court finds that the early termination provision is unenforceable?

One would assume that the employee would be entitled to a payment representing the wages for the unexpired term of the contract. However, until the Court of Appeal’s decision in Howard v. Benson Group Inc., 2016 ONCA 256, this was not necessarily the case.

In Howard v. Benson Group Inc., 2016 ONCA, two issues were before the Court of Appeal:

  1. Whether an employee, who is employed under a fixed term contract that does not provide for early termination without cause, is entitled to payment of the unexpired portion of the contract if the contract is terminated early?
  1. If so, is that payment subject to the duty to mitigate?

The facts of this case were relatively straightforward. The Employment Contract was for a fixed term. It also contained express terms permitting both the employer and the employee to terminate the contract early. The term permitting the employer to terminate early without cause 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.

The issue was originally brought before the Ontario Superior Court by way of a motion for summary judgment and the motion judge concluded that the above early termination provision was unenforceable due to ambiguity. The motion judge then determined that, notwithstanding that the contract no longer contained an enforceable early termination term and was for a fixed term, the contract failed to rebut the presumption that the contract contained an implied term requiring the employer to provide reasonable notice of termination.

As such, the motion judge found that the employee was entitled to receive common law notice of termination as opposed to the remainder of the wages owing for the fixed term of the contract. Naturally, as a result, the motion judge concluded that any damages in lieu of reasonable notice would be subject to the duty to mitigate.

This was then appealed by the employee. Somewhat surprisingly, the employer did not appeal on the finding that the early termination provision was unenforceable.

The Court of Appeal rejected the motion judge’s finding that the contract had not ousted the implied term of reasonable notice of termination. In particular, the Court made the following point:

The respondent sought to use a fixed term contract either to eliminate its severance obligation entirely or to limit it to two weeks’ notice on an early termination. It was, of course, free to do this. But the courts have consistently held that the consequences to an employee of such a bargain are so significant that the employer must communicate clearly in the contract that this is what it is intending to do… If an employer does not use unequivocal, clear language and instead drafts an ambiguous or vague termination clause that is later found to be unenforceable, it cannot complain when it is held to the remaining terms of the contract.

The Court of Appeal concluded that, in light of the finding that the early termination provision was unenforceable, the fixed term of the contract ousted the implied term of reasonable notice.

Following its own early decision in Bowes v. Goss Power Products Ltd., 2012 ONCA 425, the Court of Appeal then went on to find that, absent an express term in the contract imposing a duty to mitigate, the obligation upon an employer to pay an employee to the end of the term is not subject to mitigation.

As such, employers relying on fixed term contracts may now find themselves at some peril of substantial payments if they wish to terminate the employment relationship before the expiry of the term.

If you have any questions regarding the termination of your employment or fixed-term contracts, we encourage you to contact Tom or any of the lawyers at Shields Hunt Duff.

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