Fixed-term contracts can seem like a useful tool for employers that may not require an employee indefinitely. However, while they appear straightforward, fixed-term contracts come with certain risks and complexities that both employers and employees should know.

What is a fixed-term contract?

A fixed-term contract is an employment contract that specifies a pre-determined end date for the employment relationship. This is in contrast to the majority of employees in Ontario which operate under an indefinite employment contract.

Employers may decide to use a fixed-term contract in situations where they require a worker for a limited period of time, for instance, to cover an employee taking a leave of absence or to assist with a specific project. Fixed-term contracts appear beneficial for employers as it relieves them of the obligation to provide reasonable notice given that the fixed-term contract has a clear end date. However, it is not actually that black and white.

Risks involved with a fixed-term contract

Pursuant to a regulation under the Employment Standards Act (the “ESA”), an employee under a fixed-term contract will still be entitled to notice of termination or termination pay in the following circumstances:

• the employment is terminated before the expiry of the term set out in the fixed-term contract or the completion of the task;
• the term expires or the task remains incomplete more than 12 months after the employment started; or
• the employment continues for three months or longer after the expiry of the term in the fixed-term contract.

Employers and employees should also be aware that just because the contract states it is a fixed-term contract does not actually mean that the courts will agree. The courts have the discretion to determine whether an employee under a fixed-term contract is actually an indefinite-term employee based on the surrounding circumstances. For example, an employee that signs multiple fixed-term contracts over a period of time may be seen as an indefinite term employee. In this case, the employer would be on the hook for providing the employee with reasonable notice or pay in lieu of notice.

It is equally important to note that early termination of a fixed-term contract can expose employers to serious risks and correspondingly result in a huge windfall for employees. The courts have held that the termination provision in a fixed-term contract must be in compliance with the ESA. If an employer fails to include an enforceable termination clause within a fixed-term contract, the employee could be entitled to receive the balance of their fixed-term contract without any consideration to whether the employee mitigated their damages or not.

In 2022 ONSC 4522, a vendor owner (the “Employer”) contracted with the purchaser (the “Employee”) to remain on as an employee after the sale of its business pursuant to a three-year fixed-term contract. The Employer terminated the Employee’s fixed-term contract approximately a year later. The Employee claimed wrongful dismissal arguing that the termination clause contained in his fixed-term contract was not enforceable as it violated the ESA. The court agreed with the Employee and awarded him substantial pay equivalent to the end of the fixed-term contract, which was 23 months.

Similar risks exist in the context of independent contractors as well. In 2023 ONCA 413, an independent contractor (the “Contractor”) provided services under a 72-month fixed-term contract that did not include an early termination clause. The companies requiring the services eventually terminated the Contractor’s fixed-term contract after seven months. The Court of Appeal for Ontario upheld the trial judge’s decision to award the Contractor pay equivalent to the remaining 65 months of his fixed-term contract. However, the Court of Appeal clarified that, unlike employees under fixed-term contracts, independent contractors under fixed-term contracts have a duty to mitigate their damages unless their contract provides otherwise. In this case, the Court of Appeal found that the companies had failed to meet the burden of proving a failure to mitigate and thus the Contractor was still awarded the balance of his fixed-term contract.

Given the potential consequences involved in a poorly drafted fixed-term contract, it is imperative to approach these contracts with a clear understanding of the potential risks involved and seek legal advice if you have concerns or questions about your employment agreement.