Fixed-term contracts can expose employers to costly wrongful dismissal claims, severance payouts, and common law damages if not drafted and managed properly, lawyers say
The Canada Revenue Agency is facing criticism from the Union of Taxation Employees for not renewing over 1,000 worker contracts set to expire on May 16.
Union president Marc Brière called on Prime Minister Mark Carney and his government to stop the cuts, which he believes are an attack on the public service.
Brière says these cuts will affect the agency's contact centers, leading to longer wait times and growing frustration.
Aside from the pushback, legal experts say these contracts raise broader concerns.
Fixed-term contracts can open the door for employers to experience greater liability, says Tiana Perricone, employment lawyer from Workly Law.
“If it really is a fixed-term contract, make sure that you, as the organization, have the ability to keep that person on for the full term," she says.
Perricone says in some cases, having a worker on an indefinite term can be better than having a person on a fixed-term contract.
Fixed-term contracts are usually agreements that have a definite duration, with no expectation of ongoing employment once the term expires.
A properly drafted contract will include provisions for a defined start date and end date, and a well-drafted termination clause, according to Paulette Haynes, founder of Haynes Law.
“In that contract will be a very carefully worded termination clause, enabling the employer to terminate the relationship without triggering...the obligations for reasonable notice or pay in lieu,” she explains.
Sometimes, Haynes notes, these fixed-term contracts are used by employers to relieve themselves of the obligations associated with permanent or indefinite employees. This is because, under the Ontario Employment Standards Act, (ESA) and the Canadian Labour Code, terminating an indefinite employee without cause requires employers to provide notice or severance pay.
With short-term contracts, because the employees are not permanent, employers are not required to provide those minimums, Haynes says.
Other times, she says, these contracts are used to bring in somebody for additional help.
A fixed-term contract can include a renewal clause once the term ends, but that’s when things can get “blurry,” says Haynes.
“There might be a provision in the contract stating that if the employer intends to renew, they must give the worker 60 days’ advance notice of the end date,” she says.
Liability often arises when employers allow contracts to automatically renew into a second term, says Haynes, and this pattern can continue for years, leading courts to scrutinize the employment relationship.
Over time, employees in this situation may argue that they are effectively permanent staff, entitled to compensation and termination pay when contracts are not renewed.
Even if a renewal clause exists, repeated renewals of short-term contracts can expose employers to the same risks, Haynes says.
“Courts have taken note of the fact... that employers should not use fixed-term contracts, especially on a continual basis, to get out of the obligation they otherwise would have to somebody who is considered an indefinite-term worker,” she says.
Perricone says situations like this can also lead to common law damages awarded by courts for wrongful dismissal.
If an employer has renewed an employee’s contract for three consecutive years, for example, and then chooses not to renew it, the employee may claim wrongful dismissal, she says. Since the employee has worked continuous terms, they may argue they are effectively permanent and therefore entitled to proper notice or severance in order to be terminated.
This can leave the employer liable for common law damages.
When an employee is terminated, they have a duty to mitigate their losses by making reasonable efforts to find comparable new employment.
Under ESA, employees don’t have to look for new work to receive termination pay — they’re entitled to it regardless. However, when seeking common law damages beyond ESA minimums, the employee is expected to look for a new job. If they do, the amount the employer owes may be reduced, Perricone says.
But with fixed-term contracts, that duty doesn’t apply in the same way. Employers must continue paying for the remainder of the contract, even if the employee finds new work. In these cases, employees do not have a duty to mitigate in order to receive the remainder of the contract payout, she explains.
Other pitfalls can arise when employers end a fixed-term contract prematurely.
If an employer decides to end a fixed-term contract before it is supposed to end, they may be liable for paying the full contract period, Perricone says.
“If you hire someone for a 12-month contract, and you decide this person's not working out, and you terminate them at the six-month mark... now you're on the hook for the remaining six months under employment law,” she explains. “[Whereas] if someone worked for you for less than a year, the Employment Standards Act says you're only on the hook for one week.”
Haynes points out that even if employers add early termination clauses it can still be risky. “We have cases where, when it escalates to litigation, the courts have come down on the side of the employee, particularly if the provisions in question are not unequivocally clear and unequivocal, explicit language.”
She gives an example from the case law in Monterosso v. Metro Freightliner Hamilton Inc., where the court awarded $500,000 to a contractor terminated just seven months into a 72-month fixed-term contract. The court found that without a clear and enforceable early termination clause in the contract, the company was liable for the remaining term and damages.
Another case covered in HRD showed similar outcomes, where the B.C. Supreme Court ruled in favour of a worker who was hired under what the court determined to be a fixed-term contract. The employer ended the contract 14 months early without a clearly enforceable early termination clause, leading to the worker being awarded the remainder of the term and damages.
So how do employers make sure they are not liable for these risks? Haynes says it’s through employers first evaluating the necessity of fixed-term contract and then creating a well -written contract.
She says these include three key components:
A clear definition of the contract’s duration, including the start and end date
A carefully worded termination clause
A renewal clause, which must contain “unequivocal use, and explicit language,” according to the courts
Perricone adds that the best thing employers can do is hire an employee under an indefinite term with a probation period. That way, employers have the flexibility to terminate without cause if it turns out not to be a good fit.
“Under the law, that's less of a liability than paying someone out for the remainder of a fixed-term contract,” she says.
However, if employers want to move ahead with a fixed-term contract, Perricone encourages HR to have a thorough interview process to ensure the candidate can meet the full obligations of the term. “Because if you do put someone on a one-year contract, you have to be committed to that one year,” she says.
If you like the candidate after a fixed-term contract ends, rather than renewing it, employers should consider putting them on an indefinite term, Perricone says.
