When people, both employees and employers, think about employment, they often think about an indefinite position. It will only end if the employee wishes to leave or if the employer wants to terminate the worker. However, another common employment contract is one with a fixed-term. While fixed-term contracts serve their purpose for many employers, they can also carry many legal risks. It is important to ensure that employers are aware of all of the financial and legal risks before making an informed decision regarding what type of employment contract is best for the organization.

Employers utilize fixed-term contracts for a variety of business and legal reasons. An employer could be looking to cover a maternity or parental leave, so they hire an employee with a fixed-term of a year. Or, an employer is starting a long-term project and requires a specific type of expertise, so the employer hires someone to be employed for a 5-year term. With a fixed-term, an employer doesn’t have to make a commitment to a person for a longer period then they need to. More importantly, at the end of the term, the employee does not remain employed and the employer does not need to provide any notice or pay in lieu of notice to the employee. The employment relationship ends without the employer needing to pay more to terminate, as is required of an indefinite employee.

Fixed-term employment contracts are not free of legal risk. The most pressing question for an employer is what happens when they want to terminate a fixed-term employee without cause before their term has run out. If there is a clear and unambiguous “early termination” clause, then, then the employee will be entitled to what is stipulated. However, many times these fixed-term contracts do not contain an early termination clause, or it is improperly drafted without the aid of a professional legal counsel.

There is significant legal and financial risk for an employer to terminate an employee early without a clear early termination clause. The law in Ontario was set in the case of Howard v Benson Group Inc. where a fixed-term employee terminated early was awarded the remainder of the unfulfilled contract. Whatever term was left until the end of the contract, the employer had to pay the employee in damages. The Court of Appeal also stated that these damages were not subject to mitigation (they would not be modified under any circumstances). Even if the employee found new employment immediately, they would still be entitled to the full, unfulfilled term. A fixed-term employee with 5-year term that was terminated at the one-year mark would still be owed the remaining four years. The employer can incur a tremendous amount of financial costs for terminating the employee, much more than what the employee would have been entitled to if they were an indefinite employee and received reasonable notice at common law.

A recent case from Alberta, Rice v Shell Global Solutions Canada Inc., states that the damages suffered by a fixed-term employee who is terminated early is subject to mitigation. In this case, the employee, Ms. Rice, had a 4-year fixed-term contract with Shell. She was terminated with 34.5 months remaining on her contract. The Alberta court ruled that Ms. Rice was owed the rest of her contract and required Shell to pay damages of $257,742.91. However, what should come as a relief to employers is that the damages payment would be lessened by any mitigation of other employment Ms. Rice had during that 34.5 months.

Mitigation with fixed-term contracts is still a live issue across Canada. While the Global Solutions Canada case is good news for Ontario employers, employers must not take this as the new rule in Ontario. The Alberta case is not a binding court decision for courts here in Ontario. It is persuasive, but the Benson case is still the authority. Rice offers a glimpse into the future, of how the Ontario courts may start analyzing and deciding on the issues of mitigation and fixed-term contracts.

It is important for employers to consult with a lawyer and receive professional legal advice. As evident with the recent ruling in Alberta, the Benson case may not have fully shut the door on this issue as was previously thought. To avoid significant legal and financial risks, a lawyer can help draft the fixed-term contract with a clear and unambiguous early termination clause. A lawyer can skillfully make the argument that mitigation should be present for early termination of a fixed-term employee. Whether you decide if hiring employees on fixed-term is right for your organization, termination of such contracts is a live issue with shifting currents as to how the courts should decide on it.