The landscape of employment law, particularly regarding termination clauses, has seen significant changes in recent years. Courts have increasingly sided with employees, often rendering many termination clauses unenforceable. When a termination clause is found to be unenforceable, employees are generally entitled to reasonable notice of termination under common law, rather than the limited entitlements specified in their contracts.

Fixed-Term Contracts: A Unique Scenario

Fixed-term contracts, however, operate under a different set of rules. If an employer terminates a fixed-term contract without cause and the contract lacks a valid termination clause, the employer must pay the employee damages equivalent to the earnings they would have received for the remainder of the contract term. Here, the concept of “reasonable notice of termination” doesn’t apply. Instead, the focus is on the time left on the contract and the corresponding compensation.

Potential Financial Implications

The financial implications of terminating a fixed-term contract can vary significantly. If only a short period remains, the damages owed might be less than what would be awarded under common law. Conversely, if the contract has a long term remaining, the damages could be substantially higher. For example, terminating a contract with five years remaining could mean the employer owes the employee five years’ worth of income.

Case Study: The Kopyl Decision

A recent Court of Appeal decision, Kopyl v. Losani Homes, highlights these principles. Kim Kopyl was hired on a one-year fixed-term contract from July 6, 2022, to July 6, 2023. The company terminated her contract on January 9, 2023, leaving approximately six months remaining. Despite a termination clause that purported to allow early termination, it was deemed unenforceable as it contravened the Employment Standards Act, 2000 (ESA).

In an attempt to avoid liability, the employer argued that the invalid termination clause should also invalidate the fixed-term provision of the contract, thus converting it into an indefinite term contract. This, they claimed, would limit the employee’s entitlements to reasonable notice of termination at common law.

Both the original Application Judge and the Court of Appeal rejected this argument. They ruled that the unenforceability of the termination clause did not affect the fixed-term provision. Consequently, Ms. Kopyl was entitled to her salary for the remaining six months of the contract.

Takeaway for Employers

Many employers opt for fixed-term employment arrangements, believing they offer a way to limit legal obligations at termination. However, fixed-term contracts can actually result in substantial legal liabilities. When these contracts are terminated prematurely, employers should anticipate that employees might claim compensation for the remainder of the contract term. It is crucial for employers to meticulously review their fixed-term employment contracts. Ensuring that early termination provisions are enforceable is more important than ever to avoid unexpected financial liabilities.

If you have questions about this or other HR issues that might affect your business, please contact us at SHRP.

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