Fixed Term Employment Contracts

It's an increasingly common practice these days to hire employees for a fixed term only.  There seems to be a conception that it provides an employer with more flexibility and protection against significant liabilities.

I think that, in most contexts, there are better ways for an employer to protect its interests, which are more reliable and more certain, because fixed term contracts have shortcomings.

Here's the basic principle:  You hire Joe for a one year term.  At the end of the year, if you haven't renewed the contract, the contract expires and he is no longer employed.  No need for any notice of termination, severance, etc.  Pretty nice, right?  Well, for a public sector or charitable organization with uncertain long term funding, it makes sense.  For an employer with a specific time-limited task to be completed, it makes sense.  You want the employee to go away once the funding runs dry or the task is completed.  Or if you're filling the position of a person on parental leave, that's eminently reasonable.

But what if you're not in that situation?  Increasing numbers of employers have a position which needs filling on a permanent/indefinite basis, but will hire on a fixed term contractual basis.  The logic seems to be quasi-probationary - if you're not happy with Joe's performance at the end of the first year, you can let his contract expire and hire someone new.  And if you do renew for a second year, and a third, and a fourth, then you continue to keep your options open to refuse to renew at any given time.

There are a few problems with this approach:  Firstly, it doesn't always work.  The case law is clear that a fixed term contract is created only by "unequivocal and explicit language", and there is case law where language contemplating renewals undermines its clarity.  In the Ontario Court of Appeal's 2001 decision in Ceccol v. Ontario Gymnastics Federation, Justice MacPherson made the following observation:

It seems to me that a court should be particularly vigilant when an employee works for several years under a series of allegedly fixed term contracts.  Employers should not be able to evade the traditional protections of the ESA and the common law by resorting to the label of 'fixed term contract' when the underlying reality of the employment relationship is something quite different, namely, continuous service by the employee for many years coupled with verbal representations and conduct on the part of the employer that clearly signal an indefinite term relationship.

Thus, the Courts frown upon the 'perpetually renew a fixed term contract until we don't' approach.

Secondly, it can actually limit an employer's flexibility.  It requires regular attention to an employee's contract, and prevents the contract discussions from being, for example, delayed to accommodate a busy period.  If the 'fixed term' arrangement is to be anything other than a farce, it must be strictly adhered to.

Perhaps more to the point, if the relationship has not developed to the point that the employee has an expectation of renewal (thus raising in full measure Justice MacPherson's concerns in Ceccol), a prudent employee will begin seeking new employment months before the expiration of the contract.  That's not something an employer usually wants, and to head it off the employer will have to decide relatively early whether or not the contract will be renewed.  Which kind of defeats the point, given the alternatives.

Thirdly, there are better ways.  ESA minimums are generally fairly modest.  A contractual clause limiting an employee's entitlements to the ESA minimums will provide the same flexibility and usually more.  If I hire somebody for a one year fixed term contract, he'll be looking for a new job after 9 or 10 months if I haven't renewed.  If I want to keep him, I have to make a new offer at that point - I have to decide then whether I want to be tied in with this guy until the end of two years.  A good termination clause, on the other hand, means that I have until one week before the end of his first year to decide whether or not I want to keep him past the end of the year...but more to the point the end of the first year has very little significance.  If I don't make my decision by then, but decide after 13 months that it isn't working out, I can give him two weeks' notice.  On the other hand, if I do decide after only 6 months that I want to be rid of him, again, I can send him off with one week's notice.

Fourthly, a fixed term contract displaces the common law implied term of 'reasonable notice', and this can be a bad thing under certain circumstances.  With your standard 'indefinite term' contract, even without termination language, the common law implies an entitlement upon the employer to terminate the relationship upon provision of "reasonable notice".  But in a true fixed term contract, that entitlement doesn't exist.  In other words, let's suppose you hire a person for a relatively low-level position in a one year fixed term contract, and decide after 6 months that you don't want them anymore.  If it's an indefinite term contract with termination language, you'll owe as little as a week.  If it's an indefinite term contract without termination language, you might owe a few weeks, give or take, depending on the specific facts.  In a fixed term contract without termination language, you may have to pay out the remainder of the contract - six months - subject only to the employee's duty to mitigate.

You want flexibility?  Forget fixed term contracts; go with a good termination clause.

Much of the jurisprudence regarding fixed term contracts involves an employer trying to enforce it - you let the term expire, sent Joe on his way without notice, then Joe came back and sued for 'reasonable notice'.  But there are also cases where an employer wanted out of the contract before the end of the term, where they didn't put in another termination clause, and they think they can fire on modest notice because it's a short-service employee, and they run into the fourth problem above.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation.  If you need legal assistance, please contact him for information on available services and billing.