Beware Early Termination of Fixed Term Employment Contracts

It’s not an unusual situation – you have an employee on a limited term contract but you’re thinking of relying on the early termination clause to end the employment before the term is up. You decide to go ahead and pay out the employee whatever notice period is specified in the early termination clause; a clean and simple way to bring the matter to an end. But is it? Sometimes the application of orthodox legal principles can result in very expensive consequences that you might not have been anticipating.

That is the message from the Ontario Court of Appeal in Howard v Benson Group Inc., 2016 ONCA 256. In that case, Mr. Howard was employed pursuant to a five year limited term contract that provided for early termination as follows:

“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.”

The Benson Group relied on that provision to terminate Mr. Howard’s employment after two years, paying Mr. Howard the equivalent of two weeks’ notice and thinking the matter was at an end. Unfortunately for the Benson Group, Mr. Howard brought proceedings arguing that the early termination clause was void on the basis of ambiguity and, accordingly, that the termination of his employment was a breach of contract. That argument was accepted by the trial judge who decided that Mr. Howard was entitled to damages for breach of his implied right to reasonable notice of termination, with those damages to be assessed and subject to Mr. Howard’s duty to mitigate.

That conclusion was bad enough for the employer, but things only got worse when Mr. Howard appealed the trial judge’s decision on the issue of damages. Mr. Howard argued that the employer’s right to terminate on reasonable notice does not apply to fixed term contracts. That is, the employer contracts to employ the employee for the whole of the fixed term unless they specifically include an early termination clause. Since in this case that early termination clause was void, the employer had no right to terminate early at all and was obligated to pay Mr. Howard the whole of the balance of his contract. The Court of Appeal agreed with this argument and explained the matter this way:

“In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation.”

The result was that instead of the two weeks’ wages they were expecting to pay Mr. Howard to terminate his contract, the Benson Group was liable to pay Mr. Howard three years’ wages. An unhappy result for whoever decided to go ahead with the termination.

So what can an employer do to avoid ending up in the same position as the Benson Group in this case? In law, as in medicine, an ounce of prevention is worth a pound of cure. Two simple adjustments to Mr. Howard’s contract of employment before it was signed would have avoided the outcome in the case:

(i)    Drafting a clear and unambiguous early termination clause that complies with applicable employment standards legislation, such as the following: The Employer may terminate the Employment at any time by providing the Employee with 8 weeks’ notice or payment in lieu of notice.

(ii)   Including a clause in the contract that provides that the employee is under a duty to mitigate any and all losses suffered as a result of any breach of the contract by the employer.

In the end, the case illustrates the value both of obtaining legal advice before terminating an employee’s employment and of ensuring that employment contract templates are regularly reviewed to reflect the most recent developments in the case law. A small investment upfront can save an employer from much more expensive liability (not to mention legal costs) down the track.

Howard v Benson Group Inc., 2016 ONCA 256

Questions regarding this article are welcome to be directed to David Woolias.