Fixed-term contracts are becoming more common for employees in various industries. For instance, it may be better for employers to hire employees for fixed periods to complete a particular project. Fixed-term contracts can allow employees to pursue various work projects with employers. However, an employer’s obligations for termination in a fixed-term contract differ from those of permanent employees. Some of the terms of the fixed-term employment contract may override some common-law rights of the employee. For instance, there may be explicit terms in the employment contract that limit the amount that can be owed to the employee upon termination, and an employer may not be required to pay compensation for the reasonable notice period as determined by common law.

In this post, we will discuss an employer’s obligations for termination in fixed-term contracts. This post will also include important takeaways for employees seeking to understand their rights and employers wanting to know their obligations in a fixed-term contract. Generally, if a termination clause is invalid, it may affect the validity of other parts of the contract if that clause cannot be isolated. This post will explain what can happen if a termination clause is invalid in a fixed-term contract, including what compensation an employer must provide upon termination.

What is a fixed-term contract?

First, it is important to define what constitutes a fixed-term contract. A fixed-term contract sets out terms that the employee will only work for the employer for a set period of time. To find that there was a fixed-term contract, the employment terms need to be clear and unambiguous in the agreement.

In some cases, an employer may claim that an employee is working on a fixed-term contract based on facts or evidence outside of the contract, such as changes in circumstances where the employee eventually agreed to work on a fixed term rather than as a permanent employee. However, the employee contract cannot be converted from permanent to having a fixed term without consideration (i.e. additional benefit) to the employee, as this would be a fundamental change to the employment contract. If the employer changes the contract term unilaterally without additional consideration, it can be considered a constructive dismissal, and the employer would need to pay damages to the employee.

What are an employer’s obligations regarding termination for a fixed-term contract?

Generally, it is implied under common law in every employment contract that the employer must provide reasonable notice to an employee before they are terminated. The employer can be found to breach their obligation to provide reasonable notice or pay in lieu of notice. 

This can be overridden, however, if the employer and employee agree to it in the employment contract. To override this implied term, the employment contract must specify another period of notice, whether this is express or implied.

The implied reasonable notice terms are overridden for fixed-term contracts because the employment relationship automatically terminates at the end of the specified period. In fixed-term employment contracts, there are generally no obligations for the employer to provide reasonable notice or pay in lieu of notice for a termination without cause.

A fixed-term contract can still provide terms that set out what can happen if there is an early termination. For example, the employment contract can specify a fixed term of notice or payment in lieu. Suppose these terms are not set out in a fixed-term contract. In that case, the employer must pay the employee wages that they would have received to the end of the term if there has been an early termination (i.e. the employee was terminated before the end of the fixed period set out in the contract).

It is important to note that as this can limit the rights of employees, employers are required to use unequivocal, clear language. Any ambiguous or vague termination clauses may not be enforceable.

What if the termination clause is invalid in an employment contract?

In some cases, the court may find the early termination clause invalid. However, the nature of the contract remains the same as a fixed-term contract if that is set out in the contract. Therefore, the employee is not entitled to reasonable notice of pay in lieu from the employer.

Is an employee required to mitigate damages in a fixed-term contract?

When determining a reasonable notice period, the employee’s efforts in seeking a new comparable role will be relevant to whether they fulfilled their duty to mitigate damages. In other words, the employee must act to ensure that they are not deliberately exacerbating the employer’s damages. If the employer can prove that the employee failed to mitigate their damages, such as failing to secure a new job, then the damages paid to the employee can be reduced.

In a fixed-term contract, however, there is generally no duty to mitigate damages, as the employee is expected to be paid until the end of the contract term. In other words, the employer cannot reduce their obligations to pay up to the end of the fixed term by claiming that the employee failed to mitigate their damages, such as securing a new contract or role.

Key Takeaways

A fixed-term employment contract is quite different from an employment contract for a permanent employee. Very different rights flow from a fixed-term contract. In particular, the employee may not be entitled to reasonable notice or pay in lieu of notice, as set out in common law. However, they may be entitled to compensation until the end of the term specified in the contract if they have been terminated before the end of the fixed term. Employees under a fixed-term contract are not required to fulfill a duty to mitigate, as with permanent employees. Damages will not be reduced on the grounds of failure to mitigate on the part of the employee.

For fixed-term contracts, especially if the employer is limiting some of the common law entitlements of the employee, they are required to be clear and unequivocal in the language of the employment contract. Otherwise, ambiguous terms may be unenforceable, and very different legal consequences can flow when an employee is terminated.

Contact Haynes Law Firm in Toronto for Advice on Fixed-Term Employment Contracts 

It is important to determine whether an employment contract will be on a fixed term, as different legal rights and obligations arise upon termination. Our experienced employment law legal team at Haynes Law Firm in Toronto can assist you with issues that arise from termination. Our goal is to ensure that employees understand their rights and receive maximum compensation in termination cases. Haynes Law Firm also assists employers in avoiding liabilities that may arise from terminations that are not permitted by the legislation. We are dedicated to finding the best resolution for you. To book a consultation, please contact us online or by phone at 416-593-2731.