Is your organization walking a fine line between renewing contracts and indefinite employment relationships?
A fixed-term employment contract ends and neither side can agree on the terms of a new one, so they both walk away. End of story?
Not so much, if the last contract was the latest in a series of fixed-term contracts over years. That kind of pattern can turn fixed terms into the type of liability tied to an indefinite employment relationship, according to employment lawyer Jessica Bungay of Cox and Palmer in Fredericton.
“Employers can run into problems when they have employees on successive fixed-term contracts, because after a certain period of time where someone is continually working under such contracts, the law will view them is if they were an indefinite employee,” says Bungay. “And so you can't just rely on having one-year term contracts that renew for 20 years, and then let your contract expire and say, ‘We don't owe you anything because your contract expired’ — the law will view it more like an indefinite employment relationship and there would be entitlement to reasonable notice for termination without cause.”
And it’s a reason for HR leaders to stay on top of their organization’s practice in drafting and issuing employment contracts, and to also be aware of what their teams and management might be doing as well, says Bungay.
Practical reality of relationship
According to Bungay, the lesson is that the practical reality of the relationship will drive the legal outcome. If someone has been working year after year for the same organization, courts are unlikely to accept that their rights end with the latest term date on a piece of paper — which leads not just to liability for wrongful dismissal, but also constructive dismissal if the terms of the latest in a line of contracts departs significantly from what went before, she says.
This is exactly what happened recently to one New Brunswick employer. The province’s Court of King’s Bench found that a senior project manager was constructively dismissed after eight years working as an employee with a series of fixed-term contracts that were offered upon the expiry of each previous contract.
The court found that a disputed raise wasn’t a fundamental change. Instead, constructive dismissal turned on the employer’s attempt to introduce a new contract less than two weeks before expiry of the previous contract, that added layoff, suspension, and termination clauses that weren’t included in prior agreements. Those new provisions reshaped the risk allocation in the relationship, expanding the employer’s discretion while narrowing the worker’s security and entitlements. Yet there was no real discussion of those changes before the contract was presented, and no clear communication as the March 31 end date of the previous contract approached.
After both sides walked away from the negotiations, the worker sued for constructive dismissal. The court found the new changes amounted to constructive dismissal and the employer was ordered to pay the worker damages equal to 10 months’ pay and benefits — for eight years of employment under the series of fixed-term contracts.
Recent cases show risks of serial renewals
The fixed-term contract story is familiar for project-based and government-funded employers, as the employer had a contract with the federal government and the worker worked at a Canadian Forces base. Although using fixed-term contracts based on funding is an understandable practice for employers in such circumstances, Bungay believes that HR needs concrete limits on how long this pattern is allowed to persist before it triggers a conscious decision to convert to indefinite employment.
How the relationship will be treated depends on the circumstances, as fixed-term contracts that have gaps between them and interrupted service, such as for seasonal employees, won’t have the same risk, according to Bungay. However, she points to situations where one fixed-term contract runs directly into the next as particularly risky once several renewals have passed.
In an Ontario case in which a fixed-term contract held up to a wrongful dismissal challenge, a worker was hired under a fixed-term contract with an expected duration of two years, but the municipality that employed him extended it four times to a total of three-and-a-half years. When the contract expired in 2017, the worker sued for wrongful dismissal, arguing that the extensions indicated indefinite employment. However, the court sided with the employer, finding that there was no ambiguity in the contract’s stated intention of being temporary. The year-and-a-half extension wasn’t enough to show a change to indefinite employment, according to the court.
However, in a Saskatchewan case, a worker signed a two-year fixed-term contract in 2005, in which the contract stated that it would be renewed 30 days prior to July 1 annually. This continued for more than a decade with only changes to the worker’s job title. In 2017, the employer added new restrictive covenants and a new termination clause, and when the worker’s position was eliminated in 2022, a court found that the nature of the relationship was that of an employee-employer one due to the length of uninterrupted service and numerous renewals of the same contract. As a result, the worker was entitled to 22 months’ reasonable notice, said the court.
When ‘template updates’ become constructive dismissal
For Bungay, the missing piece for the New Brunswick employer was a transparent rollout process driven by HR, highlighting the changes and explaining them to the worker. “There were some verbal negotiations that happened first, and then [the employer] presented a contract that had things above and beyond what was discussed verbally and never highlighted,” she says. “If you're going to be making changes or introducing terms, then you need to explain them, and they need to be part of the negotiations instead of just putting them in there unilaterally.”
The risk is that when new contracts quietly strip away rights or add powerful new management tools, courts may treat that as a fundamental breach of the existing bargain — especially if employees are left to decipher the changes on their own in the shadow of an approaching expiry date, according to Bungay.
Employment lawyer Paulette Haynes of Toronto-based Haynes Law Firm notes that the New Brunswick court treated the chain of contracts as a continuous employment relationship when assessing reasonable notice and constructive dismissal, particularly since the worker effectively worked only for the employer for years.
HR's role in contract planning
Haynes says HR should approach fixed-term contract planning by asking whether a role is genuinely time-limited or likely to evolve into an ongoing need, stressing that courts are alert to serial contracts that mask what is, in substance, indefinite employment.
“Fixed contracts are great and they definitely serve their purpose if they're adhered to, especially when it comes to that expiry date,” says Haynes. “But they need to be clearly drafted and unequivocal in terms of their language, because any ambiguity is going to be construed against the employer and in favour of the employee.”
Haynes says she can appreciate why the New Brunswick employer had fixed-term contracts as its work was subject to government funding levels, but she believes that HR has to be clued into what the organization is doing and the decisions other leaders are making around such contracts. She suggests periodic reviews on the current terms of all employment contracts, particularly when using fixed-term contracts, and an ongoing assessment of the need for fixed-term contracts.
“There needs to be a deep dive around the nature of the work or the services that you want from this person,” says Haynes. “The caution that we get out of cases like this — we have a number of them in Ontario where, employees who've been hired along a series of employment fixed contracts and a court sees it as de facto employment of indefinite nature — that if the organization and HR can determine that this is likely to be of a longer nature, then get into an indefinite contract situation or, alternatively, draft the appropriate, clearly worded termination provisions in accordance with the law at the get-go.”
“I appreciate HR may not have the deciding hand into how these are done, but there should be a collective conversation within the organization, strategically, about how to manage contracts, because if there's a broken chain, even in [renewal] discussions, it can potentially expose the organization,” adds Haynes. “When these fixed contract situations become, in essence, continuous, it can add a level of complexity.”
