Fixed-Term Contracts: Canadian Employers Beware
A number of organizations erroneously believe that they can use a fixed-term or time-limited employment contract to reduce or eliminate severance liability. While this approach can be successful if used properly and with caution, a recent Ontario Superior Court of Justice decision highlights the perils of fixed-term employment contracts.
In Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 452 (SCJ), the Court had to consider a claim brought by the former owner of the company that employed him.
In December 2019, Mark Tarras and the other former owners of TMIG sold the shares in their engineering firm to another company. As part of the share purchase transaction, Tarras agreed to a three-year fixed-term employment agreement, which provided that he would continue to be employed by TMIG until December 2, 2022.
On November 25, 2020, approximately 13 months into the term of the fixed-term agreement, the employer terminated Tarras on a “without cause” basis effective December 31, 2020. The employer proceeded to continue salary and benefits until December 31, 2020. In proceeding in this manner, the employer attempted to rely upon a clause in the employment agreement which provided that the employment could be terminated without cause by providing on such notice or pay in lieu of notice as is required by the minimum provisions of the Ontario Employment Standards Act (ESA).
In his lawsuit, Tarras sued for damages for wrongful dismissal, which involved payment for the balance of the fixed-term agreement, being the 23 months between December 31, 2020 (when the employer stopped paying him) and December 2, 2022 (when the agreement was set to expire).
The focus in the Court’s decision was the termination clause in the employment agreement. In finding that the early termination provision in the employment agreement was unenforceable, the Court focussed on the “Cause” provisions in the TMIG agreement. In particular, the clause in the employer’s agreement took an expansive view of cause for termination which diverges from the provisions of the ESA. Based on recent cases which have taken the same approach, this wording was found to be in breach of the ESA since it fails to recognize the required standards under the legislation (essentially wilful misconduct). As a result, the Court found that since the “Cause” provisions in the Terras agreement, all of the termination language in the agreement, including the early termination provision, were struck.
It is notable that the Court did not accept the employer’s argument that the employee was a sophisticated party who had negotiate the agreement with the assistance of legal counsel – if the provisions are in violation of the ESA, then the agreement will not be saved.
The decision then focussed on the damages payable as a result of the termination. Given that there was not an enforceable termination provision in the agreement, the employee was entitled to be paid all compensation which would have been provided until the expiry of the fixed-term agreement. With no deduction for mitigation. The result was an award of 23 months compensation, which included salary, vacation pay, incentive compensation, and benefits.
Lessons for Employers
This decision provides a stark lesson in the perils of using fixed-term employment agreements. While having a known termination date can serve to cap the amount of compensation which is owed to an employee, this form of agreement can also result in what the employer may consider to be a windfall. This can be particularly the case when there is a termination provision in the contract. Further, the fact that the employee is sophisticated and obtains legal advice will almost certainly not save contract provisions which are problematic. In this particular case, the employer would have almost certainly been better off to have an indefinite agreement where working notice would have reduced liability, and the employee would have been subject to a mitigation obligation.