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Can employers end fixed term contracts before the term is expired?

A recent decision of the Ontario Court of Appeal, Howard v. Benson Group Inc., 2016 ONCA 256, has given employers and employees some guidance on early termination of fixed term contracts. Parties to a fixed term employment contract can specifically provide for early termination and specify a fixed term of notice or payment in lieu of notice. However, if there are no specifications on these points, the early termination of a fixed term agreement by an employer can be considered wrongful dismissal. A dismissed employee in this case will likely be awarded compensation for the remainder of their contract. The ramifications for the employer can be significant.

In this case, Mr. Howard was a Truck Shop Manager and then a Sales Development Manager. He entered into an employment agreement. The agreement stated the term of his employment was five years, commencing in September, 2012. However, his employer terminated Mr. Howard without cause 23 months later. His employer gave Mr. Howard two weeks of pay, which it claimed fully satisfied Mr. Howard's entitlements under the Ontario Employment Standards Act, 2000 ("ESA"). His employer's interpretation was that although the agreement stated Mr. Howard's job was for a five year term, it also contained a termination clause allowing termination at any time and, "any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario." The employer relied on this clause and stated Mr. Howard was only entitled to the minimum notice prescribed by the ESA.

Mr. Howard's lawyer disagreed and argued the clause is unenforceable based on three critical ambiguities. First, it did not state specifically what was meant by the term "amounts paid." There was no information as to whether this amount includes benefits and bonuses as required by the ESA. Second, Mr. Howard's lawyer argued that the phrase "any amounts" gave rise to a possible interpretation that compensation was at the discretion of the employer, which is a violation of the ESA. And third, it was unclear as to whether the amounts paid out under the termination clause were intended to be in full satisfaction of any claim that Mr. Howard may have.

The Ontario Court of Appeal found that a fixed term contract contains an inherent termination date. Therefore, if any other termination clause in the employment agreement is invalid, the fixed term of the contract remains. The Court found the termination clause was ambiguous and not enforceable in this contract. Ultimately, the employer had to compensate Mr. Howard for the remainder of his fixed term - more than 3 years of salary in an amount of over $180,000 of base salary, plus benefits.

What does this mean for employees?

An employee under a fixed term contract may receive significant compensation upon early termination. But after a fixed term is expired, the employee's term is indefinite and tenure may be shorter.

What Does This Mean For Employers?

Employers must ensure that their fixed term employment contracts contain enforceable termination clauses to avoid serious financial liability. Employers should also consider avoiding such employment agreements as the law on enforceable termination clauses is always changing.

For more information, contact Jean-Francois Lalonde.

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