The Dangers of Fixed-Term Contracts

An indefinite term employment contract is used to govern an employment relationship that is intended to provide for continuous service by the employee until either party decides to end the employment relationship. In contrast, a fixed-term contract is a contract of employment that has a specific start date and a specific end date in which both the employer and the employee agree upon that limits the employee’s length of service with the organization. Many employers choose to use fixed-term contracts when they only intend for the employment relationship to last for a specific period of time such as seasonal work or until a certain task has been completed. These two types of contracts have very different intended purposes, and accordingly, very different obligations are attached to them. If an employer does not use these types of contracts properly or blurs the lines between which obligations attach to which type of employment relationship it can create a lot of risk that can lead to very costly consequences. Most employers do not realize the repercussions or dangers that using a fixed-term contract in the wrong circumstances can create.

All employment contracts need to be very carefully drafted because they bind the employer and the employee and govern the employment relationship. If an employer is considering using a fixed-term contract, it is important that they ensure these contracts are properly drafted, have the right intended use, use clear and unequivocal language and are properly enforced. Provincially regulated organizations need to be in compliance with the Employment Standards Act (ESA) while federally regulated organizations need to ensure they follow the Canada Labour Code (CLC). An employer cannot contract out of, or provide less than what is provided for under the applicable legislation.

The following include some of the risks that can make the use of fixed-term contracts more dangerous for employers.

Termination Obligations

Provincial Regulation

For provincially regulated employers, termination can be for cause or without just cause. Generally speaking, when an employment relationship comes to an end without just cause the employer has an obligation to provide notice or pay lieu of notice. Many employers will choose to use a fixed term contract to avoid the need for notice or termination pay by including a specific date in which both parties agree the employment will come to an end. The reason for no notice is that the employee is already aware that the employment will end on a specific date and can then plan for their next employment opportunity accordingly, which makes the notice requirements under the Employment Standards Act essentially moot. In theory, this may be appealing, however, in practice it is actually quite dangerous because if the employment relationship isn’t working out and the employer wants to end the contract early it is not as simple as just paying out the entitlements under the Employment Standards Act (ESA).

Rather, if an employer wishes to end the employment relationship early where a fixed-term contract is in place, then the employer is often required to pay out the remaining amount due on contract without the benefit of receiving any work for that compensation paid. This can be tremendously costly because the employer can be left paying the employee for many weeks or months for work that is not being continued by them. This is why it is so important to really think through why an employer wants to use a fixed-term contract and whether it is actually a good fit for the circumstances. In most circumstances it is better to use an indefinite term employment contract with a strong termination clause that is enforceable and provide the employee with their entitlements upon termination if the employer wishes to end the relationship when the position is no longer needed.

To provide an example, let’s say that family-owned business was looking to hire a short-term employee to fill in for their daughter who normally works at the retail store but would be attending a college program abroad before returning to work at her family’s store again.

The business hired Jane as a sales clerk to help around the store during their daughter’s absence. They used a fixed-term contract that was intended to run for just over a year from September 2021 to November 2022. They agreed on an end date of November 1st, 2022. In October 2021, after about a month of working for the business, the employer realized Jane was not the best fit for the organization and wanted to end the employment relationship. Jane did not do anything wrong; it just wasn’t the right fit. Because a fixed term contract was used, the employer would need to pay Jane the remaining pay due and owing under the fixed-term contract, which was about eleven (11) months worth of pay, if they wanted to end the employment relationship.

If the employer had used an indefinite term contract for Jane with a properly drafted termination clause that limited her entitlements to that of the Employment Standards Act (ESA) then the employer would not have to pay anything because the termination occurred during the first three months of employment (ESA, s. 54). This is a major difference from the eleven (11) months of pay required to end the fixed-term contract.

A fixed-term contract will no longer provide the employer with any protections after the date in which the contract ends. If an employee who is provided with a fixed-term contract finishes the contract and the employer would like the employee to continue working for the organization then it is wise to provide a new indefinite-term employment contract before the end date of the fixed term contract rather than renewing the fixed-term contract over and over again, which is discussed below. If this is the case, the employer would be responsible for termination pay and severance pay under the Employment Standards Act and could be exposed to common law damages because there would be no valid employment contract in place that set out the terms of the employment relationship and limit the entitlement to ESA minimums particularly if employee continued to work even for a few hours without the benefit of a new employment contract following the end date of the fixed term contract.

Federal Regulation

For federally regulated employers, to end the employment relationship there are other parameters set out for employers to follow. If an employee has worked for the employer for more than twelve (12) continuous months then the employer cannot terminate the relationship without just cause, which can be established by either one serious event that can be proven or by proving that the employers has applied progressive discipline and the employee’s inappropriate behaviour is simply not correctible. This is a very high threshold to reach.

If a federal employee has worked for more than three (3) continuous months but less than twelve (12) months of employment, then the employer can terminate without alleging just cause and would need to provide the employee two weeks notice or two weeks pay in lieu of notice to terminate the employment relationship.

If an employee has worked for less than three (3) months for the federal organization, then no notice or cause would be required.

If the employer allows an employee to continue working after the end date of the fixed-term contract then the protection of the fixed-term contract will cease and the above provisions will apply. This is difficult because if an employee has worked for more than one year then just cause would be needed and it is very serious and very difficult to prove. The employee would need to do something so egregious that it breaks the employment relationship to a point that it cannot be remedied to be considered just cause or if the employer has applied sufficient progressive discipline such that it can be established that the employee’s inappropriate behaviour is not correctible. Only a court can truly make this determination.

Renewal of Fixed-Term Contracts

In some circumstances, employers require short-term employees to continue working after the fixed-term contract’s end date has passed. This is permissible, but should be approached with extreme caution. If the employer wishes to keep the employee on to continue unfinished work or to begin new projects, they will need to renew the contract with a new end date, create a new fixed-term contract with new terms or enter into an indefinite term employment contract. Contract renewals are allowed; however, they are dangerous. If a fixed-term contract is consistently renewed, or an employee returns year after year and is treated like a regular employee, then a court of law may deem them to actually be indefinite term employees rather than fixed-term employees. Case law has shown this pattern that if an employee is continually brought back year after year, then they should be entitled to termination protections that indefinite term employees would be entitled to under the statute or under common law because the employer has treated the relationship the same as indefinite term employees.

Due to the various circumstances and consequences surrounding the use of fixed-term employment contracts, employers should be very careful when determining whether to use these types of contracts and should always consult an employment lawyer to help mitigate risk. Proactive measures can help avoid very costly consequences in the future. Reach out to our team of employment lawyers at 705-268-6429 if you would like assistance.