Fixed-term Contracts: A Double-edged Sword For Businesses

The landscape of the modern workforce has undergone a significant transformation in recent years. The rise of different working relationships has reshaped how businesses operate and individuals pursue their careers. While most companies still hire workers as permanent employees, more and more businesses are looking for ways to adjust their workforce according to their needs. One way to ensure flexibility in the workforce is by hiring workers on fixed-term contracts.

Pros and Cons of Hiring Workers for a Fixed Term

Most people think that fixed-term contracts allow employers to adjust their workforce based on fluctuating business needs, enabling companies to bring in workers with specific expertise or skills for a defined period without having to invest in the workers’ training or long-term development. While hiring workers for a definite period may seem to allow businesses to manage their workforce cost-effectively or flexibly, hiring in this way could instead have severe legal and financial implications for businesses if fixed-term contracts are drafted improperly. This article discusses one such negative consequence and provides recommendations to employers considering hiring workers on fixed-term contracts.

Monterosso – A Cautionary Tale

The recent case of Monterosso v. Metro Freightliner Hamilton Inc., 2023 ONCA 413 (“Monterosso”) is a cautionary tale for any business that hires workers on fixed-term contracts. In Monterosso, the Court of Appeal for Ontario (the “Court”) upheld a lower court’s decision awarding a dismissed independent contractor over $552,500 in damages representing the compensation he would have earned for the balance term of his contract.

Metro Freightliner Hamilton Inc. (“Metro”) engaged Antonio Monterosso o/a Truck Leasing Canada (“Antonio”) as an independent contractor under a contract dated March 7, 2017 (“Contract”). The Contract, whose term was 72 months, did not include a provision for early termination. Despite this, Metro terminated Antonio’s services without cause on November 22, 2017. Antonio sued for the payments due for the remaining 65 months of the Contract.

The trial judge ruled in Antonio’s favour holding that the Contract did not have an early termination provision, and it clearly and unambiguously provided for a 72-month fixed term. The trial judge awarded Antonio $552,500 plus HST calculated based on the remaining monthly payments due under the Contract. The trial judge’s decision was consistent with precedent that says that if a fixed-term contract contains no provision for early termination, a worker dismissed prior to the contract’s end date is entitled to the value of payments he would have received had he been permitted to fulfill the balance of the contract.

Metro appealed the trial judge’s decision, advancing several grounds for Metro’s challenge. One of Metro’s key contentions was that the trial judge failed to consider an internal email between the parties on March 1, 2017. Metro argued that the internal communication demonstrated that Metro was allowed to pay Antonio only until his last day of active service if he was dismissed prior to the end of the term of the Contract. The Court rejected Metro’s contention on the ground that the email was ambiguous. Conversely, the Court agreed with the trial court’s finding that the Contract’s language was clear and unambiguous.

Additionally, the Court highlighted the presence of an “entire agreement clause” within the Contract, which stated that the Contract (and not some external document) contained all the terms of the agreement between Antonio and Metro. The clause, the Court held, was designed to pre-empt the kind of argument presented by Metro in Metro’s appeal. Ultimately, the Court dismissed Metro’s appeal, upholding the trial judge’s findings.

What Employers Should Know about Fixed-Term Contracts

Monterosso demonstrates that hiring workers under fixed-term contracts can present significant challenges for businesses. In Monterosso, the lack of a termination provision led the Court to enforce the full 72-month fixed term of the Contract. Fixed-term contracts present many other legal challenges too numerous to list here.

Keeping this in mind, we typically advise business owners to avoid using fixed-term contracts altogether. An indefinite term contract that contains a strong termination clause will usually give employers the flexibility they need to terminate with minimal liability when needed. If a fixed-term contract is preferred, then it should only be used for a term of less than one year, and it should include clear and unambiguous language that allows a business to terminate the contract prior to the contract’s stated end date.

A fixed-term contract should also clearly state the contract’s start date and end date. Courts may refuse to consider a contract to be for a fixed term in the absence of a clear end date. In such cases, courts may consider the affected worker entitled to greater protections under the law.

In addition, employers must be careful while extending or renewing fixed-term contracts. When a worker continues to work after the end date of a fixed-term contract, the worker’s fixed-term contract may convert into an indefinite-term agreement entitling the worker to notice of termination and other termination entitlements that may well exceed an employer’s expectations.

Given the risks associated with fixed-term contracts, business owners should seek legal advice before hiring temporary workers. An experienced and skilled employment lawyer can advise you on the potential legal implications of hiring workers under fixed-term contracts and how to protect your business from unexpected liability.