What do you get when you combine a fixed-term contract, an unenforceable termination clause and an early termination? In short, an employee that will be paid for the balance of the contract and an employer with an unexpected severance obligation.
First, it is important to acknowledge that fixed-term employment contracts can create unanticipated severance costs, which is ironic given that many employers use them in order to be able to terminate without cost. In most dismissals without cause, we assess what “reasonable notice” would be; however, if there is a fixed-term contract, then the employer will be liable for the balance of the contract if they did not include an early termination clause. That can be far more extensive than reasonable notice in some cases; in one notable case (McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home), a dismissed employee was found to be entitled to the remaining nine years of a ten year contract.
Even if there was a termination clause, the question arises as to what happens if it is found to be unenforceable. From an employer’s point of view, this is a worst-case scenario. In all likelihood, they hired the employee on a fixed term in order to avoid or minimize severance costs. After all, if there is a true fixed term contract, then the employee will not be entitled to any notice or pay in lieu; the employment relationship will simply come to an end when the contractual term ends.
The wise employer will further protect themselves by including an early termination clause. However, if that clause is unenforceable, it is treated as though it did not exist, and the employee will be entitled to be paid for the balance of the contract. That is what happened in McGuinty; the dismissal in that case was a constructive one rather than a deliberate attempt to dismiss the plaintiff, but the result was the same and since there was no termination clause, the employer had no way to reduce its liability.
In the recent decision in Livshin v. The Clinic Network, the employment agreement was part of a larger corporate transaction. It was for a fixed three year term, but due to the pandemic, the plaintiff was initially placed on a temporary layoff and ultimately dismissed.
The employment agreement included this clause:
6. End of Employment
Termination of Employment at end of Term: Unless renewed earlier in writing by the Company or terminated earlier in accordance with the provisions of this Section 6, your employment shall automatically terminate at the conclusion of the Term of this Agreement, without any further notice or payment of salary or benefit plan contributions in lieu of notice, or any other form of compensation.
c) Termination by the Company for Just Cause: The Company has the right, at any time and without notice, to terminate your employment under this Agreement for just cause.
The Court found that in accordance with the famous or infamous decision in Waksdale v. Swegon North America Inc., the for cause section was in breach of the Employment Standards Act, 2000. As a result, the plaintiff was entitled to notice pursuant the common law. Since the contract was for a fixed term, he was entitled to the balance; as he had only been employed for 16 months, there were 20 months remaining, for which he was entitled to be paid.
The bottom line is that the combination of
- a fixed term contract,
- a termination clause in breach of the employment standards legislation, and
- an early termination,
will have the effect of entitling the employee to be compensated for the balance of the contract. Employers and their counsel must be particularly mindful of this when drafting employment agreements and when implementing a termination, and employees and their counsel should not miss a somewhat unusual opportunity by assuming that “reasonable notice” will apply in these circumstances. As an aside, employers and their counsel should also remember that multiple consecutive short-term contracts will be viewed suspiciously by the courts and if they are found to be a sham, the contract will be deemed to be one of indefinite duration.