Fixed-term Employment Agreements: Draft Them Carefully

April 27, 2016

Employers often use fixed-term employment agreements to limit their future severance costs owed to employees. Although that may be an effective approach in theory, the Ontario Court of Appeal's recent decision in Howard v. Benson Group Inc, 2016 ONCA 256, reminds employers that an improperly drafted fixed-term employment agreement can be a costly approach in practice.

The Decision of Ontario's Lower Court

In the Howard case, Benson Group Inc. hired Mr. Howard for a fixed term of five years. Just before two years into the five-year term, the Company decided to fire Mr. Howard without cause before the end of the term. It relied on the following termination provision:

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.

Mr. Howard received two weeks' salary in lieu of notice. In response, Mr. Howard filed a lawsuit with the Ontario Superior Court of Justice arguing that the termination provision was not clear and he should therefore be paid out for the balance of the term (i.e., just over three years' worth of salary).

The court agreed that the termination provision contained several deficiencies, including that it did not reference benefits continuation and other minimum entitlements, but it disagreed that Mr. Howard should be paid out for the balance of the term. Rather, the court concluded that the termination provision, albeit unenforceable, qualified the five-year term.  In its view,  Mr. Howard was therefore entitled to reasonable notice of termination at common law and ordered a separate mini-trial to determine how much common law notice he would receive.

The Decision of the Ontario Court of Appeal

Mr. Howard was unhappy with the lower court's decision and decided to appeal. The main issues before the Ontario Court of Appeal were:

1. If a fixed-term employment agreement is ended early and it does not have an enforceable early termination provision, should the employee get (a) reasonable notice at common law or (b) as Mr. Howard argued, to be paid out for the remainder of the fixed term?
2. Should any payments for the remainder of a fixed term require the employee to mitigate by finding new work?

On the first issue, the Court of Appeal concluded that option (b) was the right approach. In the Court's view, a fixed term rebuts the presumption of reasonable notice at common law by providing a clear end date of employment.

On the second issue, the Court of Appeal noted that although employees have a duty to mitigate and that duty will be taken into account when determining a common law notice award, employees working under fixed-term agreements do not have that same duty to mitigate unless the agreement specifies otherwise. Mr. Howard's employment agreement did not specify that Mr. Howard had a duty to mitigate.

As such, the Court of Appeal concluded that Mr. Howard was entitled to be paid out for the remaining three years in the five-year term and that this payout should not be discounted based on Mr. Howard's mitigation efforts. This was a very costly result for the Company especially since Mr. Howard would likely have received far less notice at common law had his employment initially been for an indefinite term rather than a fixed term.

Key Takeaways for Ontario Employers

Although Howard is not a novel case, it is an important reminder for employers to make sure of the following when using fixed-term employment agreements:

• Draft a fixed-term employment agreement with an early out provision. That way, if you want to dismiss an employee without cause before the end of a fixed term, you can do so while avoiding having to paying out the remainder of the term.
• Make sure the early out provision complies with the applicable employment standards legislation otherwise it will be unenforceable.
• Include a saving provision in the fixed-term employment agreement that confirms the applicable employment standards legislation governs to try and remedy any real or potential conflict between the fixed-term employment agreement and that legislation.
• Consider including a duty to mitigate clause into the fixed-term employment agreement.

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