Fixed term means fixed damages

05 January 2017

Uncertainty about committing to long term employment relationships often induces companies to hire people for short, fixed terms. What employers have been finding out is that this is not a guarantee of containing the cost of ending an employment relationship.

Employers should take careful note of the Ontario Court of Appeal’s decision partially overturning the decision of the motions judge in Howard v. Benson Group Inc., 2016 ONCA, 256.

In 2015 Justice MacKenzie found for the Plaintiff employee declaring unenforceable a termination provision which provided:

Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.

The Plaintiff was a 57 year old who had been hired pursuant to a five year fixed term contract commencing Sept. 4, 2012. After eight months of employment the Plaintiff was transferred from the position of Truck Shop Manager to Sales Development Manager. His employment was subsequently terminated July 28, 2014 after almost two years of service with slightly more than 37 months left to run on the fixed term contract.

The Plaintiff brought a motion for summary judgment seeking the balance of his base salary ($60,000/annum) and the value of bonus and benefits for the remainder of the contract totalling some $194,284.93.

The employer relying upon the contractual termination provision provided the employee with a two week severance package in accordance with the employee’s statutory entitlements under Section 57 of the Employment Standards Act.

The motion’s court judge pointed to the power imbalance between the parties and declared the contractual termination provision to be sufficiently ambiguous that it must be construed against the employer; however, Justice MacKenzie felt that the contract did not nullify the implied common law term that the contract could be terminated upon reasonable notice and ordered a mini trial with respect to such notice and the corresponding duty to mitigate.

The employee appealed with respect to the quantum of damages and the duty to mitigate. The Ontario Court of Appeal was not asked to comment on the enforceability of the termination provision which finding was not appealed.

Justice Miller, writing for a unanimous bench, held that the fixed term of the Employment Agreement rebutted the common law presumption that the employment contract could be terminated upon reasonable notice, pointing out that had the contract run its natural course, the employee would have been entitled to nothing further at the conclusion of the term. The excision of the unenforceable termination provision had no impact upon the fixed term nature of the employment contract. Rather, the contract simply had no enforceable provision for early termination other than for just cause.

Notwithstanding a provision in the employment contract that it could be terminated “at any time”, the court held that the common law presumption of the right to terminate upon reasonable notice had been ousted and with it the duty to mitigate. The court relied heavily on the 2012 decision of the Ontario Court of Appeal in Bowes v. Goss Power Products Ltd., 2012 ONCA, 425 where a contractually fixed notice period was found to be distinguishable from the common law of reasonable notice and to be treated in the nature of a liquidated damages provision without the need to mitigate unless so required by the contract.

The Court of Appeal has made it clear that in the absence of a contractual mitigation provision, there will be no obligation to mitigate where the common law presumption of reasonable notice has been displaced by either a contractually fixed notice period or a contractually fixed term of employment.

That is not to say that a properly drafted fixed term Employment Agreement cannot contain an enforceable termination provision within the fixed term. Where however the contractual termination provision is held to be unenforceable, the measure of damages will be the value of all compensation and benefits over the unexpired portion of the term without regard to mitigation.

Employers are strongly urged to seek legal advice prior to entering into any form of employment relationship, be it short term or indeterminate. The consequences of not doing so are almost always far more expensive than seeking some up-front guidance.


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