In the recent decision of Tarras v. The Municipal Infrastructure Group Ltd. [Tarras], the Ontario Superior Court of Justice (the “OSCJ” or “Court”) highlighted the risks associated with entering into a fixed-term employment relationship.
The Plaintiff, Mr. Mark Tarras, was a professional engineer and one of the former owners of the Defendant Company, The Municipal Infrastructure Group Limited (the “Company” or “TMIG”). The Plaintiff, along with the other former owners of TMIG, sold their interest in the Company in December 2019.
At the time of the share sale, Mr. Tarras negotiated an employment agreement with TMIG pursuant to which he became a Vice-President. The employment agreement was for a fixed term of 3 years, until December 2022.
In December 2020, Mr. Tarras was dismissed by the Company on a “without cause” basis. He filed a lawsuit against the Company as a result of his dismissal. The only issue in dispute was the enforceability of the termination clause as written in the employment contract.
General Legal Principle
In jurisdictions where the statutory standard of “cause” is different than under the common law (Judge-made law), an invalid “just cause” provision within an employment agreement can invalidate the entire contract, even in the context of a fixed-term contract, as confirmed in the Tarras decision.
The OSCJ relied on the legal principle established in the recent ground-breaking decision of Waksdale v. Swegon North America Inc., where an employer’s “just cause” termination provision which did not comply with the minimum standards of the Employment Standards Act, 2000 [ESA] was deemed to void an otherwise legally enforceable termination clause within the same contract.
The OSCJ held that the termination clause in the fixed-term employment agreement was unenforceable because the clause allowed the Company to potentially deprive Mr. Tarras of his ESA entitlements.
The Court awarded the Plaintiff damages for the remainder of the fixed-term contract which amounted to 23 months worth of severance pay, totalling approximately $480,000.00. In addition, the Plaintiff was awarded damages for the loss of his employment benefits, vacation pay, and incentive compensation.
The Bottom Line
Fixed-term contracts may be appropriate in situations where there is a definite and logical end to the employment relationship, such as for employees who cover statutory leaves of absence, carry out time-limited projects or work only during historically busy periods of the year.
However, in most cases, fixed-term contracts should be avoided by employers at all costs. The Tarras decision is a reminder that fixed-term contracts could represent a significant risk. Employers should:
- Consider whether a fixed-term contract is required at all: In most cases, an employer is better off entering into an indefinite term employment contract, with a well drafted termination clause allowing it to terminate the contract without cause at any time, provided the employee’s minimum statutory standards are met.
- Use a valid termination clause in a fixed-term contract: If a fixed-term contract is required, the employer should negotiate the right to terminate the contract early by providing notice or pay in lieu of notice. The employer should ensure that this termination clause is enforceable. If it is not, the employee will likely be entitled to damages for the unexpired portion of the contract, as seen in the Tarras decision.
- Review existing fixed-term contracts: If an employer has existing employees on fixed-term contracts, it should ensure that those contracts have enforceable termination clauses. If they do not, the employer should consider negotiating new terms of employment in exchange for valid consideration.
At Hyde HR Law, we offer expert legal advice on drafting, reviewing, and revising employment agreements, whether fixed-term or indefinite. Please do not hesitate to contact us.