A fixed term employment contract is meant to provide certainty to both the employee and the employer. However, where the drafting is deficient, that certainty can vanish and result in significant liability for the employer.
A recent Ontario Court of Appeal decision, Howard v Benson Group Inc., 2016 ONCA 256, highlights the perils of a deficient fixed term contract. In this case, an employee was fired 23 months into his 5 year employment contract on a “without cause” basis. The employment contract between the parties included a termination clause that the Court found to be unenforceable due to ambiguity. The result of this finding was that the employer was ordered to pay the employee his full salary and benefits owing for the balance of the contract, a period of 37 months. Furthermore, the employer did not get the benefit of mitigation reducing what it owed the terminated employee.
Generally when faced with damages, a party has a duty to mitigate. In the employment law context this means that the terminated party has to actively look for a new job and if they get a new job, their compensation reduces the damages owing. At its lowest level, the duty to mitigate dictates that an effort to find suitable alternative employment be made.
In this case, the Court confirmed that for those who have fixed-term employment contracts, there generally is no duty to mitigate your damages. In agreeing to a fixed term, the parties have also agreed to a fixed amount of damages where there is an early termination. This relieves the terminated employee of the mitigation obligation.
This Case also reminds employers that the damages for these fixed term contracts need not be the balance remaining on the contract at the time of termination. A properly drafted clause that sets out the employee’s damages upon an early termination is enforceable in these situations and assists the employer in avoiding unintended liability.
The bottom line here for employers and employees negotiating fixed term contracts is to turn their minds to what their rights and obligations are in the case of an early termination. Clear contractual terms will provide certainty. It is always advisable to seek legal advice from an employment law lawyer when negotiating an employment contract.