Termination of Fixed Contracts: What Employers Need to Know

Terminations are a natural occurrence in every business. However, wrongful terminations or having incorrect or vague termination clauses in your employment contracts could lead to wrongful termination suits. This is especially important with fixed-term contracts. Having iron-clad contracts with clear termination clauses in line with the Employment Standards Act (ESA) is crucial.

In early 2024, the Superior Court of Justice ruled in favour of an Ontario employee in a wrongful termination claim. The case of Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029, assessed if the employer was in breach of the ESA. The employee was in a fixed-term contract with the corporation that was set to end December 31, 2024. However, the employer terminated the contract without cause in January 2023.

The court ruled that the termination clause in the contract breached the employee’s ESA termination entitlements, which meant it was not enforceable. The employee was awarded a total of $157,071.57 in damages, which was more than double her annual salary.

This ruling has brought attention to fixed-term contracts, the termination clauses included, and the rights of contract employees.

What are the rules around fixed-term contracts?

There are several rules an employer must observe to protect themselves from a potential termination suit when drafting and executing a fixed-term contract. Having incorrect or unclear clauses can render the termination clause unenforceable. A few of these include:

• A without-cause termination should not give the employer the sole discretion to terminate an employee “at any time.”
• Employers can include a just-cause termination provision without defining “just cause” or describing the types of behaviour that will constitute just cause. Defining “just cause” limits the employer to exactly what is defined in the contract.
• Employers cannot limit an employee’s just-cause termination entitlement beyond notice (e.g., defining that an employee would only be paid base salary at termination) as this risks illegally excluding an employee’s ESA termination entitlements.
• Ontario employers must distinguish between common law grounds for just cause and ESA standards of cause. A blanket just-cause termination clause that withholds an employee's statutory and severance pay risks breaching their ESA termination entitlements.

Are there benefits to hiring a contractor?

There are several benefits to hiring contractors, especially for small and medium-sized businesses. For example, if you have short-term one-time projects, workforce may only be necessary while the project is active. Or, if you operate a seasonal business, you may only need some positions filled during specific times of the year.

What are the rights of a fixed-term contract employee in Ontario?

It is important to note that there are two different types of contractors – independent contractors and dependent contractors. The rules for termination may vary depending on the contract you execute.

Independent Contractors – Employers are only required to provide independent contractors with exactly what is outlined in the contract. They are not required to withhold taxes, Employment Insurance (EI), give vacation or holiday pay, or provide benefits.

Dependent Contractors – This term refers to self-employed workers who receive majority or all their income from one company. Similarly with independent contractors, employers are not obligated to provide benefits or withhold taxes. However, because dependent contractors typically have one main source of income, the courts view their termination rights differently than

Dependent contractors must receive reasonable notice of termination in recognition of their economic dependence on a single employer.  Thus, employers that end the contractual relationship without notice or pay in lieu may face a wrongful dismissal claim and pay common law reasonable notice of termination.

Need help creating iron-clad fixed-term contracts?

The terms of your contracts will vary depending on the needs and nature of your business. Our expert HR and legal team can help you develop contracts in line with the ESA and avoid thousands of dollars in fines. We also offer smart HR software to make your daily HR tasks quick and convenient. To learn more about how our services can benefit your business, call us today at 1 (833) 247-3652.