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5 Reasons Why Employers Should Avoid Fixed-term Contracts

Teachers, seasonal workers, project-based employees: For some jobs, fixed-term employment contracts are commonplace and make intuitive sense. But they are seldom practical and often risky for employers.

Here are five reasons why we advise our clients against fixed-term contracts:

1) You could end up paying an exceptionally large termination package

The legal presumption is that the employee is entitled to full payment for the full term. In Howard v Benson Group Inc. at the Ontario Court of Appeal, that meant the plaintiff was owed a whopping 37 months’ pay for the unrealized balance of his 5-year fixed term contract. The employer had attempted to protect itself with an early termination provision, but the court found it was void.

2) If the term lapses, the contract is worthless

Keeping the employee for even one day past the fixed term can undo all of your planning and preparation. If you do, you may be deemed to have entered an indefinite employment relationship, which may only be terminated on the provision of “Reasonable Notice”.

3) “Renewal” and “Extension” are tricky business

For instance, two periods of employment with the same employer less than 13 weeks apart are added together and treated as one, regardless of any “fixed term” designation. In addition, if an employee signs a series of fixed term contracts with the same employer, the specified “end date” can lose legal significance.

4) “Non-renewal” is a form of termination

“Non-renewed” employees may still be entitled to severance pay under the Employment Standards Act and at common law.

5) Term contracts can damage employee morale

Employees may feel insulted and devalued by an offer of term employment, especially when their peers are employed indefinitely. An offer of indefinite employment with a probationary period often serves the same purpose without the baggage of a fixed term.

The alternatives are simple and relatively painless: Employers may rely on termination provisions that limit the employee to the statutory minimum notice, which in some cases may be as little as 1 week’s notice per completed year of service. Employers can also craft employment agreements that allow for temporary layoffs, changes to duties, etc.