A Poorly Drafted Fixed-Term Contract at Dismissal Can Be Costly

An improperly drafted agreement can be costly as Benson Group Inc. recently discovered when its court case ended in a judgement for the employee of 160 weeks’ pay.

At issue was an employment contract, signed by the employee, that permitted dismissal with only two weeks’ severance. While there is nothing legally preventing an employer from taking this action, omissions in the contract cost the employer up to 80 times the severance it would have paid.

When John Howard accepted a manager’s position with the automotive service centre, Benson Group, in Bowmanville, Ont., he signed a five-year employment agreement. Like most fixed-term contracts, this one had a provision allowing for earlier termination. That clause stated: “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.”

When Howard was fired 23 months later without cause, Benson Group relied on the early-termination provision. But the court frowned on the contract, saying it was unenforceable both because it did not provide for continuing benefits as required by the Employment Standards Act and because it was too vague, failing to specify that apart from the the ESA payments the employee would be entitled to no further amounts for termination or severance pay, or any other form of wrongful dismissal damages or other compensation.” In the absence of an enforceable early-termination provision, Howard was entitled to the balance of the five-year contract, or 37 months.

As well, the Ontario Court of Appeal concluded that, in the absence of a specific contractual term requiring a duty to mitigate or stipulating a reduction, if Howard found other work during the balance of the five-year term, he would be paid the full amount without deduction for new income and without obligation to look for employment.

This sends a message to employers to never enter into fixed-term contracts that are longer than, say, a few months. The only reason to ever use them is that employment ends at the conclusion of the contract. This decision by Ontario’s highest Court makes it clear, if an employee is terminated before the end of the term, they will be entitled to full payment of the balance, not even subject to any duty to mitigate unless there is a valid early termination provision.

As well, if an employee is allowed to work even a day beyond the end of the fixed term, the employment becomes an indefinite-term one, subject to termination only by the employer paying full wrongful dismissal damages, again without any advantage from the contract.

Termination provisions are increasingly being struck down by courts for not being sufficiently clear or for not requiring the continuation of Employment Standards benefits for the limited period required by the Act (in addition to wages).

These contracts must be tightened up given the predations of the recent case law. In the same way, employers must ensure mitigation (ie economic relief for the employer if the employee finds other work during the severance period) is stipulated in the contract.

Without this, employees can hit the jackpot with court ordered severances dramatically above what they could ever hope to recover in the absence of any contract at all.