Employers sometimes prefer to use fixed term contracts rather than the typical indefinite term contracts, such as when they are uncertain about the long-term need for a position or want to “test drive” the employee. Certainly, in some situations fixed term employees will be best. However, there are landmines to watch out for.
Fixed vs. indefinite term
A fixed-term employee is a worker who is engaged to work for a specific limited length of time. Conversely, an indefinite-term employee is one who works under a contract that has no specific end date.
The termination of a fixed term employment contract before the end of its term can attract significant liability, if the contract doesn’t explicitly provide for early termination.
In the normal course, employees are entitled to common law reasonable notice of termination (unless the contract says otherwise) and statutory notice. Employers often assume that by using fixed term agreements, they can avoid those obligation. The reality is more complicated.
Statutory notice: A fixed term contract presumptively expires at the end of its term, with no need for the employer to communicate an intention to terminate. In that event, the arrangement would come to an end with no need for common law or statutory notice.
However, the Alberta Employment Standards Code states that termination notice is not required if an employee is employed for a definite term not exceeding 12 months, on the completion of which employment ends. If the term will last longer than 12 months, at least Code notice is required.
Similarly, if the employer decides to dismiss the worker before the end of the term and the employee has worked for more than 90 days, it must provide Code notice.
Contractual damages: A contract of employment for a definite term represents a promise by the employer to engage the worker for the full duration of that term. If the promise is breached, the employee could be entitled to compensation for pay over the unexpired portion of the term. For example, if an employee is engaged for two years but the employer terminates the contract after only one year, it could be liable to pay compensation for the remaining one year. That would represent a longer period and then common law reasonable notice in the same circumstances.
To avoid having to pay a dismissed worker for the unexpired portion of a fixed term, the employer should ensure the contract explicitly provides for early termination.
Termination late in the term: If the employer includes an early termination provision in the contract (as it should), that clause should account for a situation where termination takes place late in the term. If the termination clause provides for a longer period of notice than the amount of time remaining in the original term of contract, the employee may be entitled to pay for the full duration of the notice period, even though that would leave them with more money than had the company permitted them to simply work out the original term.
For example, suppose an employer were to engage an employee under a three-year fixed term contract that included a termination clause entitling the employee to 12-month’s salary on early termination. If the employer were to terminate that contract with only six months remaining in the original three year term, the employee would be contractually entitled to payment pursuant to the termination clause rather than compensation for pay that would have been received to the end of term.
Employers can avoid that situation by explicitly precluding payments upon termaination that are greater than the value of the unexpired portion of the term.
Exceeding the end of term creates an indefinite term contract
Once a worker is integrated into the business, it is easy to let the end of the fixed term pass unnoticed, or at least unmentioned. If that happens without a new contract being entered, the fixed term contract will transition into an indefinite term contract (absent contractual language providing otherwise). That could render important provisions in the original fixed term contract inapplicable moving forward.
For example, if the fixed term contract contained in early termination clause entitling the worker to statutory minimum notice only, the company may lose the benefit of that termination clause after the contract transitions into an indefinite term arrangement. In that event, the employee may be entitled to common law reasonable notice of termination.
Careful with a series of fixed term contracts
The strategy of having long-term workers sign periodic fixed term contracts can backfire. There have been cases where the employer required its employees to sign new contracts every year for a number of years and the court determined that the reality of the contract was an agreement for an indefinite term. In that event, the employer would not be able to dismiss the employee at the end of a term without providing notice.
There are situations when using fixed term employees would be preferable for business. But employers shouldn’t assume it is always “safer” or “easier”. Fixed term contracts introduce additional concerns, including those raised here, that employers should be mindful of.