The Risks of a Fixed-Term Contract: The Importance of Proper Wording

The Ontario Superior Court of Justice has provided another example of why employers should avoid fixed-term contracts unless absolutely necessary. While fixed-term contracts have the benefit of expiring without further obligation from the employer, there are many factors to consider before entering into a fixed-term agreement. The analysis in Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 4522 details the importance of a properly worded fixed-term contract, without which an employer could be held liable to compensate an employee for the remainder of the term contract.  

Case Background

In Tarras v. The Municipal Infrastructure Group Ltd., 2022 ONSC 4522 (“Tarras v. The Municipal Infrastrucure”) the Plaintiff sued his employer for breach of contract and wrongful dismissal of a fixed-term contract.

The Plaintiff was an engineer and one of the former owners of the Defendant, The Municipal Infrastructure Group Limited (TMIG). In December 2019, the Plaintiff sold his interest in the company to T.Y. Lin international Canada Inc., a large international engineering firm.

At the time of the sale, the Plaintiff negotiated an employment agreement with TMIG to become a vice-president. The employment agreement was for a fixed term of three years, until December 2, 2022. The agreement also provided for a gross base salary of $250,000 per annum, along with other forms of compensation, including fringe benefits and an incentive compensation plan.

On November 25, 2020, the Plaintiff received a termination letter from TMIG pursuant to which he was dismissed on a “without cause” basis effective December 31, 2020. The Plaintiff’s salary and benefits were terminated effective on December 31, 2020, two years before the end of his fixed term contract.

To support their dismissal, TMIG relied on the early termination clause in the Plaintiff’s employment contract:

Termination for Cause

TMIG may terminate Employee’s employment hereunder for “Cause” immediately upon delivery of a written termination notice to Employee. “Cause” means the repeated and demonstrated failure on Employee’s part to perform the material duties of his/her position in a competent manner, which Employee fails to substantially remedy within a reasonable period of time after receiving written warnings and counseling from TMIG; Employee engaging in theft, dishonesty or falsification of records; Employee willful refusal to take reasonable directions after which Employee fails to substantially remedy after receiving written warnings from TMIG; or any act(s) or omission(s) that would amount to Cause at common law. In the event that Employee’s employment hereunder is terminated pursuant to the provisions of section 11 (a), Employee shall not receive payment of any kind, including notice of termination or payment in lieu thereof, or severance pay, if applicable, save and except accrued and outstanding salary and vacation pay.

Termination Without Cause

TMIG may terminate Employee’s employment in it’s sole discretion for any reason whatsoever without Cause or upon expiry of the Term, by providing Employee with notice of termination, or payment in lieu thereof, or a combination of both, and severance pay, if applicable, pursuant to the Ontario Employment Standards Act, 2000.

The Court established that the termination clause was deemed unenforceable. The language used in the termination provision, specifically the Termination for Cause section, was contrary to the wording of the Employment Standards Act, 2000 (“ESA”). The Court further stated that any provision in the termination clause of an employment agreement that contravenes the ESA or deprives an employee of their statutory entitlements under the ESA, renders the entire agreement null and void. As such, the court awarded the Plaintiff $479,166.67 plus benefits, which represented the 23 months remaining in the fixed term contract.

No Duty to Mitigate in Fixed-Term contracts

As reiterated in Tarras v. The Municipal Infrastrucure, fixed-term contracts do not require the employee to mitigate their damages by seeking new employment after termination. The Court of Appeal has addressed this question in several cases, including recent decisions in Howard v. Benson Group Inc (2016), McGinty v. 1845035 Ontario Inc. (2019), and Livshin v. The Clinic Network Canada Inc. (2021).

The Importance of Proper Wording

The wording in the termination clause made it possible for the Defendant to terminate the employee for conduct which met the common law standard of cause but did not rise to the standard required by the ESA. The Court maintains that it is the wording of the termination provision in question that determines if a contract contravenes the ESA.

Upon further review of the employment contract in Tarras v. The Municipal Infrastrucure, the Court highlighted several other provisions that failed to include the proper wording pursuant to the ESA. Among others, they highlighted the following sections:

  • “the repeated and demonstrated failure on Employee’s part to perform the material duties of his/her position in a competent manner”;
  • “Employee engaging in theft, dishonesty or falsification of records;
  • “Employee willful refusal to take reasonable directions;” or,
  • “any acts or omissions that would amount to cause at common law”.

The Court explained that these provisions created a different standard of behaviour for employees than those set out in the legislation. Not only can improper wording nullify a provision of an agreement, but it can also deem the entire contract unenforceable as demonstrated in Tarras v. The Municipal Infrastrucure.

Takeaway

This decision highlights the importance of review and proper wording of an employment contract to ensure compliance with the ESA. As a general rule, poorly drafted termination provisions that contravene the ESA are likely to void the entire employment agreement. An employer should take proactive steps to ensure proper revision of their fixed-term contracts to reduce the risk of an unenforceable termination provision.

If you are an employer that has questions regarding your fixed term employment contracts, please reach out to the lawyers at Sicotte Guilbault.