Fixed-Term Contracts: Pros and Cons

by Chris Justice

Thursday, March 9th, 2017 at 9:20 pm

Fixed-Term Contracts vs. Indefinite-Term Contracts

In today’s economic climate, there are a growing number of employees who are being hired pursuant to fixed-term contracts as opposed to indefinite-term contracts of employment.  The idea of only committing to hiring an employee for a specified period of time may seem particularly appealing for many employers.

Reasons for this approach could include situations where the employer is unable to afford to hire an employee for an indefinite period of time, or where the employer wishes to hire an individual for a particular project with an end date.  Other examples include where someone is being hired to replace an employee on leave, or simply because the employer is attempting to avoid the typical notice and severance obligations that are owed to indefinite term employees who are terminated.  Regardless of the reason, both employees and employers need to know of the various issues associated with the use of fixed-term contracts.

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Why Employers Are Choosing Fixed-Term Contracts

As mentioned above, one of the reasons for the use of fixed-term contracts is because the employer is attempting to avoid common law notice and/or severance obligations and various other liabilities typically present where an employee is hired under an indefinite term of employment.  While employees hired pursuant to indefinite term contracts are generally entitled to statutory and/or common law notice following a dismissal, employees hired pursuant to fixed terms are generally not entitled to any termination pay following the expiry of the contract’s term.   Given this significant difference, the courts in Canada require that the terms and conditions of fixed-term contracts are clear and unequivocal.

Despite the intention of many employers in this regard, very careful drafting of the contractual language is essential.  In the absence of such drafting, employers may actually be exposed to a greater amount of liability than had they simply hired the employee pursuant to an indefinite term of employment.  The reason for this is because, under common law, when terminating a fixed-term contract which does not contain an enforceable early termination clause, the amount of damages is not the common law notice period, but rather the balance of the wages owed for the remainder of the fixed-term (from the date of the employee’s termination).

For this reason, the employer should have a particularly good reason, and not simply to avoid notice and/or severance obligations, for wanting to hire an employee on a fixed-term basis.

While the use of fixed-term contracts carries with it many challenges, there are some benefits to hiring somebody to this type of contract.

One of the biggest benefits to fixed-term contracts is that, where the contract is valid and fully enforceable, the employer can avoid any notice or severance payments following the expiry of the fixed-term.  However, as employers often find out, ensuring that the contract is in fact valid and fully enforceable can be a challenging endeavor.  Furthermore, and as mentioned, in light of the difficulties that a lot of employers face when dealing with fixed-term contracts, the employer may have a good reason to use one.

In cases where the employer knows they will only require the employee for a short period of time and they want to manage the expectations of the employee, making it abundantly clear that the employee is only hired for a specific period of time could reduce the risk of a disgruntled employee (and thus the risk of a lawsuit) following the termination of their employment.

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Tips for Employees

  • Be aware of the relevant employment standards legislation (this actually applies to both employees and employers). For example, in Ontario, under the Employment Standards Act, in the context of fixed-term contracts, an employee is entitled to statutory notice or pay in lieu of notice of termination in the following situations:
  1. Where a fixed-term contract exceeds a period of twelve months;
  2. Where employment ends before the end of the fixed-term; or
  3. Where the fixed-term is extended more than ninety days beyond the original term.
  • Just because the term in your fixed-term contract expires, and you are no longer employed, does not necessarily mean that you unentitled to notice and/or severance pay. In cases where an employee is hired under a series of fixed-term contracts over the course of many years, there is a good chance that the courts in Ontario would deem that employee to be hired pursuant to an indefinite term of employment.  In these cases, and where the most recent fixed-term contract expires (and the employee is no longer employed), the employee could be entitled to significant termination pay.

Tips for Employers

  • Use clear and unequivocal language in the contract. If the contract stipulates that the employee will be hired pursuant to a fixed-term, but the essence of the contract is such that it could either end earlier or be extended beyond the original term, this may lead a judge to think that the intention of the parties was that there was no definitive term of employment or, at the very least, there is ambiguity as to what the contract actually meant.  Any such ambiguity could render the term unenforceable.  A fixed-term contract should also clearly state what happens in the event the employee’s employment is terminated prior to the end of the term.  Furthermore, if there is an expectation by the employer that the employee has a duty to mitigate their damages following any termination, the contract needs to state that very clearly.
  • Understand that the terminology used in the contract is not necessarily the determining factor. Employers must understand that it is the overall character of the employment that often determines whether the employee is hired pursuant to a fixed-term or an indefinite one.  Make sure your intentions regarding the employment relationship are clear.  Ensure that the employee understands they are being hired pursuant to a fixed-term.  Make sure it is told, both verbally and in writing, that following the expiry of the fixed-term the employee is not entitled to any statutory or common law notice of termination.
  • Consider abandoning the idea of fixed-term contracts. Given the precise language and understanding between the parties that is often required in the context of fixed-term contracts, it may be more beneficial for the employer to simply hire the employee pursuant to an indefinite term contract with a well-drafted termination clause permitting the employer to end the employment relationship early.  This would likely remove the potential for the employee to recover the entire balance of the contract’s fixed-term as opposed to reasonable common law notice (which could be significant financially).

Whether you are an employee hired pursuant to a fixed-term, or you are an employer trying to decide whether you wish to hire someone under a fixed-term or terminate a fixed-term employee’s employment, it is absolutely essential that you contact a lawyer so that you are aware of all the potential issues and your own rights and entitlements.  We are Samfiru Tumarkin LLP have the experience and expertise to address any and all issues concerning fixed-term contracts.

The courts in Canada require that the terms and conditions of fixed-term contracts are clear and unequivocal. Click To Tweet

Chris Justice is an associate lawyer with Samfiru Tumarkin’s Labour and Employment Law Practice Group in Toronto, Ontario.

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