HAVING AN OUT FOR A FIXED TERM CONTRACT

15. January 2020 0

Many employers arrange employment relationships under a “fixed term” contract.  Fixed term contracts run for a set period of time and specify the date on which the employment ends.  These types of contracts can be beneficial as they provide greater certainty that an employee will fulfill the full term of the engagement. They are often used in circumstances of a sale of a business where the new owner wishes to have the previous owner continue as an employee for a transition period. A recent Ontario decision demonstrates the extremely high cost that can be faced by an employer if they have not carefully drafted the fixed term contract to include provisions for early termination.

The case of McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home) 2019 ONSC 4108 is the highest damage award on record in Canadian wrongful dismissal law.  Mr. McGuinty sued his employer for constructive dismissal following a number of changes that were made to his compensation and the conditions of his employment.  The background to this case is unique in that Mr. McGuinty was a previous owner of the funeral home.  He sold the home to the defendant and a term of the sale was that he would continue to work for the new owner for a period of ten years.  The terms of his ten year employment were specified in a written employment agreement.  The agreement did not contain any provision for early termination by either party.

Only one year into the contract, the employer unilaterally imposed a number of changes to the plaintiff’s compensation and conditions of employment.  Mr. McGuinty took the position that the changes amounted to a constructive dismissal and sued for damages.  On the evidence, the following changes to compensation and conditions of employment were found:

  1. Termination of his use of a company vehicle;
  2. Recruitment of an employee subordinate to Mr. McGuinty to track his time;
  3. Not paying commissions that he was entitled to;
  4. Removing his photograph from the funeral home; and
  5. Changing the locks to the funeral home.

The judge found that these changes constituted a course of conduct which in all of the circumstances would lead a reasonable person to conclude that the employer no longer intended to be bound by the terms of the contract, or in other words, amounted to the constructive dismissal of the plaintiff.  The constructive dismissal triggered Mr. McGuinty’s entitlement to damages.

In assessing damages, the Court cited the well established principle that an employee wrongfully dismissed under a fixed term employment contract that does not contain an early termination provisions is entitled to damages for the remaining portion of the agreement, without an obligation to mitigate.  Accordingly, Mr. McGuinty was entitled to the compensation and benefits he would have received had the remaining nine years of his ten year contract been honored.  For Mr. McGuinty that amounted to damages totaling almost $1.3 million dollars.

This case confirms a well established principle that in the absence of an expressly specified notice period, when a fixed term agreement is terminated without cause prior to its expiry, the employee is entitled to damages for the unexpired portion of the employment contract, with no duty to mitigate.  As noted by the Ontario Court of Appeal in Howard v. Benson Group Inc., 2016 ONCA 256:

Where an employment agreement states unambiguously that the employment is for a fixed term, the employment relationship automatically terminates at the end of the term without any obligation on the employer to provide notice or payment in lieu of notice.  Such a provision, if stated unambiguously, will oust the implied term that reasonable notice must be given for termination without cause…

Of course, parties to a fixed term employment contract can specifically provide for early termination and….specify a fixed term of notice or payment in lieu.  However….if the parties to a fixed term agreement contract do not specify a pre-determined notice period, an employee is entitled on early termination to the wages the employee would have received to the end of the term…

This case highlights the importance of considering and putting into place provisions for early termination of the contract, even in circumstances where a fixed term is desired.  Circumstances and situations can arise that make the employment unworkable and a failure to include an early termination provision in the fixed term contract can prove to be very costly for the employer, particularly in circumstances of a long fixed term contract.  Including provisions that allow for early termination and specifying the notice required can give employers the ability to respond to unforeseen circumstances without facing significant liability.

For assistance on developing policies and procedures in your workplace, contact Rose Keith, QC at rkeith@harpergrey.com or anyone else from our team listed on the Authors page.

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