Some employment contracts are for a predetermined fixed period, in contrast to traditional employee contracts which are of indefinite duration. An issue that sometimes arises is the consequences of terminating a fixed-term employee prior to the end of the term.

This article considers whether a fixed-term employee is entitled to be paid out for the remainder of the term if they are terminated without cause, using a recent decision of the Ontario Superior Court of Justice in which an employee claimed almost $500,000 after being terminated before the expiry of his fixed-term contract.

What are fixed-term employment contracts?

A fixed-term employment contract is set up with a specific duration period, clearly stating the date on which the employment relationship will end. Subject to any specific terms of the contract, the period of employment will simply end on the specific date.

Employers sometimes use fixed-term contracts if they want an employee to work on a specific project or to cover for another employee who is on leave. 

What happens if an employee is terminated before the end of the term?

The terms of the particular contract are all important when it comes to determining the implications of terminating a fixed-term employee prior to the end of the term.

Suppose the fixed-term contract contains an enforceable provision allowing termination prior to the end of the term, for example by specifying a fixed term of notice. In that case, this provision will apply if the employer seeks to terminate the employee without cause. This will also relieve the employer from paying the employee to the end of the term.

However, in the absence of an early termination clause, courts have held that an employee terminated before the expiry of the fixed term is entitled to be paid damages equal to the amount of the employee’s pay until the end of the term. In addition, there is no obligation for the employee to mitigate their damages by attempting to secure alternative employment. 

Plaintiff sells company and stays on as a fixed-term employee

In Tarras v The Municipal Infrastructure Group Ltd., the plaintiff engineer, and former owner of the defendant, sold his interest in the company by way of a share sale to a large international engineering firm.

At the time of the sale, the plaintiff negotiated an employment agreement for a fixed term of three years. He was a vice-president and paid a base salary of $250,000 per year plus fringe benefits and an incentive compensation plan. 

Approximately one year later, the plaintiff was terminated without cause. He commenced proceedings for wrongful dismissal. 

The employment agreement purported to allow the defendant to terminate the plaintiff’s employment without cause or upon expiry of the term by providing notice pursuant to the Employment Standards Act (the “Act”). It also contained a clause allowing the defendant to terminate the plaintiff for cause, defined to include any act or omission that would amount to cause at common law, immediately upon receiving written notice and without receipt of any notice period or payment in lieu. 

Court found termination clause in the agreement unenforceable

Justice Smith, consistent with other recent Ontario decisions, found the termination clause unenforceable. 

Under the Employment Standards Act, statutory notice is not payable in limited circumstances only, such as where the employee has engaged in wilful misconduct. His Honour explained that the common law meaning of cause is frequently a much lower standard than that of the Act. In this case, it was possible for the employer to terminate the employee without paying notice for conduct that meets the common law standard of cause, but which does not rise to the standard required by the Act.

His Honour relied on previous authority which stated that if any provision in the termination clause of an employment agreement contravenes the provisions of the Act, or deprives an employee of their statutory mandated entitlements under the Act for conduct lower than the standard set by the the Act, the entire termination clause was void. 

Plaintiff entitled to payment and benefits for unexpired term of the fixed-term contract

Given the lack of an enforceable termination clause, Justice Smith noted that a fixed-term employment contract obligates an employer to pay an employee to the end of the term. 

His Honour disagreed with the defendant’s argument that the plaintiff would obtain a windfall by receiving the balance of the employment contract and amounts owing under the sale contract: 

“In my view the defendant is comparing apples to oranges. The share sale agreement, and the employment agreement, are two completely different agreements, involving two completely separate transactions. The plaintiff is unquestionably entitled to his share of the proceeds of the sale of the business to the defendant. Equally, the plaintiff is entitled to the salary and related benefits conferred upon him by the provisions of the employment agreement.”

Plaintiff had no obligation to mitigate damages

The plaintiff had not looked for work since his termination, due in part to a non-competition clause in the agreement and in part to his age. Justice Smith explained that an employee terminated from a fixed-term employment contract had no duty to mitigate

His Honour awarded the plaintiff the equivalent of 23 months’ salary, being the balance of the fixed-term contract, along with the total value of vacation pay, proceeds from the incentive compensation plan and all other employee benefits for the unexpired term. 

Contact Grosman Gale Fletcher Hopkins LLP in Toronto for Guidance on Employee Termination

If you are an employer or an employee going through the termination process, contact Grosman Gale Fletcher Hopkins LLP. We have helped workplace parties with their most challenging employment-related matters for more than three decades. We assist employers when it comes to drafting fixed-term employment contracts, helping to avoid future liability in wrongful dismissal claims. We also help employees secure all their entitlements in the event of termination. 

We are one of Canada’s most recommended labour and employment law firms. Contact us online or call us at 416.364.9599 to learn more about how we can assist you with a workplace issue.