Dangers of Fixed-Term Contracts

A recent decision of the Ontario Superior Court of Justice once again highlights the dangers of retaining employees on longer fixed-term contracts, without having effective early termination provisions.

In Tarras v. The Municipal Infrastructure Group Ltd., the plaintiff was one of the owners of an engineering company that was sold to a larger international firm in December 2019. At the time of the transaction, the plaintiff also signed a 3-year employment contract with the purchaser, which was to expire in December 2022. However, in November 2020, the new owners terminated his employment, with approximately one (1) month's notice. The plaintiff commenced an action for wrongful dismissal, seeking damages representing compensation (base salary and incentive bonus, as well as benefits) for the outstanding balance of the contract term. The case proceeded by way of summary judgment motion.

The parties agreed that the matter was appropriate for summary judgment, and the focus of the legal argument was on the enforceability of the termination provisions in the employment agreement the plaintiff had signed. The agreement contained both "for cause" and "without cause" provisions. The "for cause" provision cited various examples of serious misconduct, but made no reference to the Employment Standards Act, 2000 or the "wilful misconduct" standard, while the "without cause" paragraph permitted termination "by providing Employee with notice of termination, or payment in lieu thereof, or a combination of both, and severance pay, if applicable, pursuant to the Ontario Employment Standards Act, 2000", as well as benefits continuation during the statutory notice period. The motion judge noted that cause at common law and "wilful misconduct" "are two different notions" and that the common law standard is "frequently a much lower standard than that of the ESA". In light of this deficiency, and the post-Waksdale case law, the judge found that the termination provision was unenforceable, as it permitted termination without notice or pay in lieu of notice in circumstances where an employee would still be entitled to statutory notice or termination pay. He further rejected the argument that the "sophistication" of the plaintiff should be considered in analyzing the enforceability of the contract provisions, rather than focusing on "the plain wording of the agreement" (para. 29).

Given that the termination provisions were null and void for violation of the ESA, the judge then went on to assess the proper quantum of damages. In light of long-standing precedents, the answer was clear: he was to receive payment "in an amount equal to his salary, vacation pay, the proceeds from the incentive compensation plan, and all other employee benefits, for the unexpired term of the employment agreement", a period of almost two (2) additional years. Furthermore, as the contract was silent on the duty to mitigate, the plaintiff had no obligation to look for other work or otherwise make efforts to curb his damages during the remainder of the contract term. In the result, the plaintiff was awarded close to $479,166.67 in damages for 23 months' salary, as well as the value of the other compensation and benefits items for the same period.

While it may sound like the needle is stuck on the record, the message for employers remains the same. Be cautious before signing on to long-term fixed duration contracts, and ensure that your termination provisions have been reviewed with an eye to being compliant with the more recent case law of the Ontario courts. Failure to do so can be very costly.

Do your employment agreements need a review or is your organization thinking about refreshing contracts? Contact [email protected] for guidance on updating your documents.

Operating as Ceaser Work Counsel since early 2014, Lance Ceaser is a 19+ year management-side labour and employment lawyer operating from London, Ontario, where he resides with his lovely spouse, a dog and 2 cats. Lance has provided timely, cost-effective advice to organizations of all sizes in virtually every sector of industry and the public sector throughout his career.