The Dangers of Fixed Term Contracts

Employment Contracts | Misclassification of Workers | Mitigation

We have previously noted that employers need to exercise caution when utilizing fixed term contracts. A recent decision of the Ontario Court of Appeal is an important reminder of how costly such agreements, when not used correctly, can be for businesses. In Monterosso v. Metro Freightliner Hamilton Inc. the Court of Appeal upheld a damage award of $552,500.00 + HST to an independent contractor whose contract was terminated prior to the end of the fixed term.

The Court of Appeal found that the agreement between the parties clearly and unambiguously provided for a 72-month fixed term, and did not contain any type of termination provision. Without such a provision, the Company did not have the right to terminate the agreement early, as it attempted to do only 7 months into the term. As a result, the contractor was entitled to damages equal to the compensation he would have earned for the balance of the contract.

The Company attempted to argue that the contractor had a duty to mitigate his damages by securing other work. The Court of Appeal agreed that the trial judge had not properly considered this issue. The Court noted that the trial judge had adopted the reasoning in Howard v Benson Group Inc., which found that where a fixed term agreement is terminated early, an employee is entitled to damages equal to the loss of remuneration for the balance of the fixed term, without a duty to mitigate. However, Howard did not speak to whether such a duty would apply to an independent contractor in the same situation.

The Court of Appeal noted that the contractor was not in an “exclusive, employee-like relationship” with the Company, nor was he dependent on them for his income. As a result, there was no basis for the trial judge to conclude that the respondent was not subject to the ordinary duty to mitigate that arises when a contract is breached.

Despite this, the Court of Appeal found that the Company had not satisfied its burden to establish that the contractor had failed in his duty to mitigate. The contractor had filed extensive evidence documenting his mitigation efforts, whereas the Company had led no evidence to establish that there were jobs the contractor could have taken. The appeal was therefore dismissed.

The Company in Monterosso could have avoided this extensive damage award by:

  1. including a provision for early termination in the fixed term agreement, or
  2. simply having an indefinite term agreement with the contractor which contained a termination clause allowing them to terminate the relationship when they saw fit to do so.

As independent contractors do not have the same entitlements to notice as employees do, the cost to the Company in this case to part ways with the contractor could have been extremely minimal. Instead, the improper use of a fixed term contract ended up costing them significantly.

Given the risks, fixed term contracts should never be utilized without careful consideration. If you are thinking of hiring an employee or independent contractor on a fixed term basis, we strongly recommend that you contact us first.

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