By Raquel Chisholm

Many associations use fixed-term contracts for their employees.  Charities and non-profit organizations often receive their funding (from the government and other sources) on a fixed term basis and they regularly tie their employment contracts to this funding.  If the funding is for three years, the employees working on that project will be placed on corresponding three-year employment contracts.

But what happens in the case of lost funding?  Or what if the employee is not working out?  There are occasions when employers wish to terminate the employment of an employee in advance of the end of their contracts.  However, fixed-term employment contracts can be a significant liability for employers if they do not have a termination clause expressly included in the written agreement.

The reason that fixed-term contracts can be such a liability is that reasonable notice is not required when there is a fixed-term contract.  In the normal course, the employee is aware of the termination date when entering onto the contract.  When that day arrives, the employer has no further obligation to the employee.  However, if the employer wishes to terminate the contract before that date, the law is clear :

When an employment contract is entered into for a defined time period, damage calculations will be based upon the unexpired portion of the contract and not on a period of reasonable notice, unless the agreement provides otherwise.

The Ontario Superior Court’s 1999 decision in Spark v. Generex Pharmaceuticals, Inc. illustrates this potential “pitfall” in using fixed-term contracts.  In Spark the Court found that an employee who never actually started the job of President was entitled to the unexpired portion of the contract rather than a period of reasonable notice – in this case, all three years at a yearly salary of $100,00.00!  This case was affirmed by the Court of Appeal.  The trial judge wrote:

Turning to the calculation of the plaintiff’s damages, the first point to note is that his was not a contract for an indefinite hiring, which could be terminated by the employer upon reasonable notice.  Rather, his contract was for affixed term.

The law concerning damages for wrongful termination of fixed-term employment contracts is accurately summarized in the following passage…

When a contract of employment is entered into for a fixed term rather than an indefinite time, the calculation of damages for dismissal is based on the unexpired portion of the contract, rather than on a period of reasonable notice.  Thus, the employee will normally be entitled to damages equal to the compensation due under the entire balance of the contract…

The basic principle of compensation is that the plaintiff is entitled to be put, so far as money can do it, in the position that would have been occupied if the wrong had not been done.  This principle in a case where the plaintiff is deprived of opportunities to render services and earn a reward suggests as a starting point the amount of the reward (wages, commission or price) that would have been earned.

This employee was awarded $300,000.00 in damages and he never worked a day for the employer.  With this case in mind, employers who enter into fixed-term contracts with employees should also include an “escape” clause which would allow the parties to terminate the contract short of the fixed-term without attracting damages amounting to the unexpired portion of the term.

Raquel Chisholm, LLB, CAE, B.A. is a lawyer with the firm Emond Harnden LLP.  You can reach her by phone: (613) 563-7660 (ext. 241)

On the web at www.emondbarnden.com or by e-mail at rchisholm@emondharnden.com