Ontario case deals with 'invalid' termination clauses in fixed term agreements
Earlier this year, the Ontario Superior Court of Justice released its decision in Kopyl v Losani Homes (1998) Ltd. o/a Losani Homes, assessing the legal impact an unenforceable termination clause will have on a fixed term contract.
Speaking to HRD, Alex Lemoine, associate at Stikeman Elliott, says that this decision highlights the importance of employers understanding both the benefits and the often-misunderstood risks of fixed term employment agreements.
But first, employers need to grasp the differences in how employee termination entitlements are assessed under indefinite term employment relationships compared to fixed term employment relationships.
The hidden legalities of fixed term contracts
“From what we see at Stikeman Elliott, the vast majority of employees are employed on indefinite term agreements – however, there are a small subset of fixed term [agreements],” he says.
In the absence of an enforceable written agreement to the contrary, indefinite term employment agreements in Ontario are subject to an implied term that the employees are provided with reasonable notice of the termination of their employment, as determined and calculated in accordance with common law, says Lemoine.
“This is a standard rule. So, unless they have a contractually agreed term to the contrary, or they've engaged in sufficiently serious misconduct, an employee is considered entitled to that notice.
“The assessment of common law reasonable notice entitlements tends to be much more of an art than it is a science. Our court uses factors like the employee's age, length of service and the character of their employment to determine that reasonable notice.”
However, if the employer does not provide reasonable notice, then the employee's recourse “is to commence an action asserting that they have been wrongfully dismissed - that insufficient notice was provided – and, as a result, the contract of employment was breached,” he says.
“If the court awards damages, they're going to effectively put the employee in the position he or she would have been in, had reasonable notice been provided, or at least make a good faith effort to do so."
However, "like many breach of contract cases, those wrongful dismissal damages are subject to a duty on the part of the employee to take active steps to try to mitigate their asserted damages,” says Lemoine.
“Now, in most employment cases, that typically means trying to locate some form of alternative employment or self-employment. And, if the employee actually mitigates - so actually finds that alternate employment - then the amounts the employee earned would typically be deducted against the damages owed by the employer.”
In contrast, as it relates to fixed term employment agreements, employees are not due that implied term of reasonable notice of a termination. Instead, in the absence of an enforceable written agreement to the contrary, employees will be due damages equal to the unexpired portion of the term.
Importantly for the purposes of the Losani Homes decision, unless there is an enforceable clause requiring an employee to mitigate damages associated with the termination of their employment, such damages are not subject to an implied duty to mitigate.
Breakdown of Losani Homes case
In this case, the plaintiff was an employee at Losani Homes on a one-year fixed term employment agreement. Before the end of that year, the employee's employment was terminated. The employee and employer both challenged the validity of the termination provisions in that agreement and took the position that the termination provisions were not enforceable.
“What was interesting about this is that the employer challenged [the enforceability] as well,” says Lemoine. “Both parties challenged the enforceability of the employment agreement in a similar way, and they seem to use similar reasoning. However, they took vastly different stances on the implication of that invalidity, or what flowed from that."
“Due to a unique Ontario requirement, the contract of employment in issue in this case provided for the possibility of a termination without notice in a circumstance where notice was required by our employment standards legislation."
Here, the employee’s counsel argued that the unenforceable provision should result in the employee due damages equal to the unexpired portion of the term, and that such damage should not be set off against any mitigation earnings, he says.
“In contrast, the employer’s counsel argued that the clause fixing the term of the agreement to one year was, in effect, a termination clause and should be struck down alongside the other termination clauses,” adds Lemoine. “The implication of the employer's position is that the fixed term is no more. Instead, the employee would be considered to be on an indefinite term agreement, and, therefore, entitled to that reasonable notice” and requiring the employee to take steps in mitigation of any damages.
Court sides with employee
But, the court didn’t agree with the employer – and, instead, sided with the employee. In fact, the court found that there was nothing "mischievous", as Lemoine puts it, about unambiguously establishing a fixed term - there was nothing that the employee needed protection from in that respect.
“The court refused to invalidate the fixed term or, in fact, any other terms of the employment agreement that were unrelated to the termination provision,” he says. “And, effectively, awarded the employee the wages and benefits that the employee would have received until the end of the one-year fixed term contract.”
In Lemoine’s view, this decision further highlights the risks of fixed term agreements and "confirms that drafting deficiencies in an employee's employment agreement or in the termination provision will not necessarily cause unambiguous fixed term agreements to become indefinite term agreements."
‘Check your employment agreements closely’
So, what does this mean for employers? And, more specifically, what future ramifications could it have on their employee contracts?
“Employers would be well advised to take stock of their existing employment agreements,” says Lemoine. “We think that employers should only be using fixed term agreements in appropriate circumstances where they make sense."
“Now, appropriate circumstances should be judged on a case-by-case basis. We often recommend that these fixed term agreements only be used in limited circumstances, like discrete coverage for maternity leave.”
Lemoine typically recommends that fixed term agreements only be used:
- If the fixed term is for a period of one year or less
- If the employment is intended to be limited to a fixed term period - as an interim role or temporary coverage
- If the end date is likely to be definitive - and it's unlikely that the employee is going to stay on after.
“There are circumstances where you might stray from those rules, but that’s the guidance we typically offer,” adds Lemoine.
“Depending on the current state of the employment agreements, employers might wish to adjust their templates to be used for new hires – and in some circumstances may wish to consider a strategy for implementing new employment agreements. This is to ensure both parties are held to the bargain that was originally intended."
Key takeaways for Canadian organizations
For Lemoine, there are four key takeaways that employers can glean from this ruling:
- Fixed term agreements may carry significant (and often unknown) risk.
- A fixed term in an employment agreement is not likely to be invalidated by an unlawful termination provision.
- A void termination provision may not automatically render void other aspects of the employment agreement that are unrelated to the termination provisions.
- It’s critical that employment agreements are thoroughly reviewed by experienced legal counsel.
“In the case of the fourth point,” says Lemoine, “we’re seeing more and more of these challenges to the enforceability of employment agreements every year. Even over my period of practice, I've seen an escalation of the number of challenges that we're seeing."
“As a result, it's become absolutely critical that employers are ensuring that their offer letters, employment agreements, incentive compensation plans, and other employment related documents are thoroughly reviewed by experienced legal counsel, such as the team at Stikeman Elliott, to ensure that these agreements are up to date.”