A new decision from the Ontario Court of Appeal shows the potential downside of fixed term employment contracts for employers and the importance of proper drafting.
John Howard was 23 months into his five-year fixed term employment contract when he was terminated without just cause by Benson Group Inc. Howard sued for breach of contract, claiming his salary for the remaining 37 months of his contract. The contract stated, “(t)he Employee and the Employer may terminate the Employee's employment at any time in accordance with the terms and conditions of this Agreement” and that “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.”
At trial, Benson Group Inc. argued that it terminated the contract in accordance with the agreement, which it claimed limited its liability to two weeks’ salary in lieu of notice in accordance with the minimums set out in the Employment Standards Act. The Ontario Superior Court of Justice found though that the contractual wording was ambiguous in this regard and therefore the clause was unenforceable. Interestingly, the trial judge ordered damages to be assessed in accordance with the common law rather than contractual damages for the unexpired term.
Howard appealed to the Ontario Court of Appeal, arguing that since it was a fixed term contract, the damages should be his salary for the remainder of the term with no requirement for him to mitigate those damages.
In its decision dated April 8, 2016, the Ontario Court of Appeal pointed out that employees are entitled to reasonable notice under the common law unless there is an agreement to the contrary. Employers are entitled to use contracts to limit notice and severance obligations, but because this results in significant consequences for employees, the law requires that employers use unequivocal, clear language to that effect. Since the contract in this case was clear that the agreement was for a fixed term and there was no unequivocal and clear notice period for early termination without cause, the employee was entitled to his salary for the remainder of the fixed term.
The Court also concluded that Howard had no duty to mitigate. Unlike in circumstances where the common law notice period applies, the law does not generally require mitigation where the penalty of early termination is either fixed or the wages and benefits for the unexpired term.
Lessons for Employers
In circumstances of termination without just cause, employment contracts can offer employers significant protections. In particular, they can allow employers to reduce significant notice periods or pay in lieu that would normally apply. In order to avail of this protection, however, courts are clear that the limiting language must be clear and unequivocal or the clause will be declared unenforceable. Where a contract has no language limiting the notice period, or where the language is inadequate, employers will generally be liable to its employee for an amount equivalent to the remainder of a fixed term contract’s duration or where the contract is indefinite, for the common law notice period.
A full copy of Howard v. Benson Group Inc. may be found at the following link: Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256 (CanLII)
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Employer Liable to Terminated Employee for Remainder of Fixed Term Employment Contract