Fixed-Term Employment Contracts: What You Should Know

There are a variety of employment contracts governing the employer-employee relationship. Within the spectrum of varieties are two main types, being (1) fixed-term contracts and (2) indefinite-term contracts.  While most contracts are indefinite in nature, fixed-term contracts represent a sizeable number of existing agreements.

The fixed-term contract is generally less understood than indefinite term contracts. Given this, and below, we discuss the difference between fixed and indefinite-term contracts and some of the repercussions of using a fixed-term contract.

Fixed-Term Versus Indefinite-Term Contracts

As discussed, an employer and employee can enter one of two contract types: (1) fixed-term contract or (2) an indefinite-term contract:

• Fixed-term contracts have a set end date. When used properly, these contracts govern the employee’s terms of employment until the end of the term at which point the employee and employer can end the contract or re-engage on new terms.
• Indefinite-term contracts have no end date. This does not mean that the employee cannot have their employment terminated. Under an indefinite-term contract, the employment continues simply until the employment is terminated pursuant to the contract, statute and/or the common law.

Repercussions of Using Fixed-Term Employment Contracts

It is generally risky for an employer to engage an employee via a fixed-term employment contract. Below we outlined some key sources of this risk:

Termination Pay Obligations May Increase

When an employer terminates an employee’s employment without cause, they are required to provide the employee with notice of that termination or pay in lieu of notice.

When using a fixed-term employment contract, in theory, employers can avoid the need to provide the employee with notice of pay in lieu. The idea is that the employee is already aware of the end date of their employment and can govern their actions accordingly.

However, if there is no termination clause (or an unenforceable termination clause) in a fixed-term employment contract, then the employer has no right to terminate the contract early. If an employer wishes to terminate the employment early, it must pay the employee for the balance of the contract.

In some cases, this can result in an obligation to provide the employee with far more pay in lieu of notice than the employee would have been entitled to at common law.

Given the above risk, hiring an employee pursuant to an indefinite-term contract with a clear termination clause is often more beneficial.

Inadvertently Entering an Indefinite Contract of Employment

Another common risk is that employers often forget that an employee was hired under a fixed-term contract and the parties then continue the employment relationship beyond the contract’s end date. At that point, the contract becomes one of indefinite duration in law and the employee would be to common-law notice of the termination of their employment. This can result in an entitlement to as much as 1-2 months of notice/pay in lieu of notice for every year of service the employee completes.

Even if the employee is offered a new fixed-term contract at the end of the initial contract period, there is a risk that a court could determine that the employment is indefinite in law, thereby invalidating the fixed-term contract(s).

Tips for Using Fixed-Term Employment Contracts

Generally, we recommend considering using an indefinite-term employment contract wherever possible; however, in cases where this is not possible or appropriate, employers should:

• Document the reasons for the fixed-term contract;
• Clearly state that it will not automatically be renewed;
• Not allow the employee to continue working beyond the term unless they actively negotiate a renewal or extension; and
• Be mindful of changing circumstances. If the underlying reason for the fixed-term nature of the contract, such as unpredictable funding, should change, consider changing the contractual relationship as well.

Ultimately, the employer should have documentation to satisfy a court that the contract was not simply an attempt to avoid legal obligations that would arise if the contract was of indefinite duration.

If you have questions in relation to fixed or indefinite term contracts, or if you were subject to a recent termination of employment or otherwise, we encourage you to reach out to us to discuss your options. Please contact Toronto employment lawyers, Sultan Lawyers, at 416-214-5111 or here.