A recent decision of the Ontario Court of Appeal examined the intersection of two areas of employment law: termination clauses and fixed-term contracts. The decision reinforces the trend of Courts interpreting employment contracts to the benefit of the employee, as well as our warning to employers not to use fixed-term contracts unless it is necessary.
The Law on Termination Clauses and Fixed-Term Contracts
The law on termination clauses in employment contracts continues to evolve, and in recent years this movement has clearly been towards the side of employees, with many termination clauses now being found to be unenforceable. In most cases, when a termination clause in an employment contract is unenforceable, the employee will be entitled to reasonable notice of termination pursuant to common law, rather than being limited to the entitlements specified in the contract.
Fixed-term contracts are an exception to this rule.
When an employer:
- terminates a fixed-term employment contract without cause, and
- there is no valid termination clause,
the employer owes the employee damages equal to the amount that would have been earned under the contract for the duration of its term.
In these situations, the concept of “reasonable notice of termination” is not relevant, and the employee’s damages will depend on:
- How much time remained in the fixed-term contract; and
- The amount they would have received if their employment had continued to the end of the term.
If the term of the contract was near its end, these damages could be less than what the employee would have received at common law. In situations where the contract had a lengthy term remaining, these damages could be significantly more than that of common law. For instance, if there were five years remaining on the term of the contract, the employer would be on the hook for the income the employee would have received for the full five-year period.
The Kopyl Decision
In the recent Court of Appeal decision of Kopyl v. Losani Homes (1998) Ltd., the employer adopted a creative argument and attempted to apply Court decisions on termination clauses to its own benefit. The employer argued that the invalid termination clause should invalidate the fixed-term provision of the employment contract. However, the Court on the original Application as well as the Court of Appeal did not buy this argument and found that the employer could not take advantage of its defective termination clause as a way to avoid its legal obligations under its fixed-term contract.
Kim Kopyl was hired by Losani Homes (1998) Ltd. (the “Company”) on a one year fixed-term contract from July 6, 2022, to July 6, 2023. On January 9, 2023, the Company terminated the contract, with approximately six months remaining in its term.
Although the contract contained a termination clause that purported to allow the Company to terminate the contract early, there was no dispute that the termination clause contravened the Employment Standards Act, 2000(the “ESA”) and was unenforceable on that basis.
This decision is consistent with the recent trends in the law on termination clauses. The Ontario Court of Appeal’s decision of Waksdale v. Swegon North America Inc. in 2020 had a dramatic impact on the enforceability of termination clauses. Since then, there have been further Court decisions that expand the reasons why a termination clause can be found to be unenforceable.
One of the takeaways of the Waksdale decision was that all termination clauses in an employment contract are treated as one clause. If one such termination clause is invalid, that will void the other termination provisions in the contract. For instance, a “with cause” termination clause that violates the ESA will also render a “without cause” termination clause to be unenforceable, even if they are written as separate provisions in the contract.
In the Kopyl case, the Company’s lawyer tried to apply this rule to the benefit of the employer. He argued, both to the Application Judge and to the Court of Appeal, that the “fixed-term” provision of the contract was effectively another termination clause. Therefore, the argument went, if the termination clause of the contract is unenforceable, then so should the “fixed-term” provision, which would convert the fixed-term contract into one of indefinite duration and this would entitle the employee to reasonable notice of termination at common law rather than damages for the remaining term of the contract.
Both the Application Judge and the Court of Appeal disagreed with the Company’s lawyer and sided with Ms. Kopyl. They found that while the termination clause was unenforceable, this did not impact the “fixed-term” provision, and thus Ms. Kopyl was entitled to be paid her salary for the remaining six months of the contract.
Evidently, both Ms. Kopyl and the Company must have presumed that the six months remaining on the contract was longer than the period of reasonable notice that would have been awarded at common law. An additional reason why Ms. Kopyl’s lawyer argued the contract should be treated as a fixed-term contract, and the Company’s lawyer argued that it should be treated as one of indefinite duration: the issue of mitigation.
The Application proceeded on the basis that Ms. Kopyl had not made any efforts to mitigate her damages during the unexpired portion of the contract’s term. At common law, this failure to mitigate could have reduced or even eliminated the employee’s damages. In the case of a fixed-term employment contract, the employee does not have any duty to mitigate their damages when an employer ends the contract early. The Courts found that Ms. Kopyl was on a fixed-term contract, and therefore her damages were not reduced at all due to the issue of mitigation.
Conclusion
Whether you are an employer or an employee, this case demonstrates the need to seek legal advice when entering into a contract and when a contract is terminated. Fixed-term contracts can result in unexpected liability for an employer and can impact the damages that an employee can claim.
If you have any questions about your situation or if you would like to get legal advice, please feel free to contact us.
