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What’s the fix to ending a fixed-term contract early?

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Fixed-term contracts are those that anticipate and set out a certain length of employment. But what if the parties want to bring the relationship to an end within the fixed-term? Is the employer on the hook to pay for the remaining term? This was precisely the question before the Ontario Superior Court of Justice recently.

The employee in this case had executed an employment contract with the employer for a five-year period, beginning in September 2012. By July 2014, the employer no longer wanted to continue the employment relationship, and terminated the employee on July 28, 2014. At this time, there was approximately three years left on the contract. The employer provided the employee two weeks of pay, as per the termination clause in the fixed-term contract. In that regard, the termination clause set out that the fixed-term contract can be terminated at any time by the employer and “any amounts paid to the employee shall be in accordance with the Employment Standards Act of Ontario”.

The employee commenced legal action and sought payment for the remaining term of his contract (i.e. 3 years).  He also argued that the termination clause was not enforceable for a number of reasons. This included the ambiguity around what the phrase “amounts paid” referred to (i.e. benefits, bonuses). The employee argued that this unclear language did not adequately contemplate benefit continuation and did not confirm whether the “amounts paid” would be in full and final satisfaction of his entitlements upon termination.

The employer, while disagreeing that the termination clause was unenforceable, argued that the relevant fact was that there was a termination clause which showed the parties’ intention to end the fixed-term contract early, if needed. Therefore, the only amount payable if the termination clause was unenforceable, was the common law reasonable notice owed and not the amount remaining on the fixed-term contract.

The Court agreed that the termination clause was not enforceable because it was unclear on the employee’s entitlements on termination. As such, the employee was entitled to common law reasonable notice.  Despite this finding, the Court did not agree that the employee was entitled to also be paid the remainder of the fixed-term contract. The Court found that the existence of a termination clause, albeit an unenforceable one, was enough to indicate the parties’ intention to bring the fixed-contract to an end without payment of the remainder.

This decision is helpful for employers seeking the flexibility of an early end to a fixed-term contract. Ideally, employers will include enforceable termination clauses in contracts to provide clarity and predictability around termination entitlements but even in the event that such language is void, the existence of early termination language may save employers from paying a terminated employee for the full duration of an unfulfilled fixed-term contract.

Parisa Nikfarjam

About the Author: Toronto Employment Lawyer Parisa Nikfarjam regularly speaks to human resources professionals, educators, and business owners about employment law and workplace human rights issues. Parisa has designed and delivers interactive workshops on such topics as youth employment, harassment and bullying, and social media in the workplace.