Fixed Term Contract Costs Funeral Home Almost $1.3 million

In a recent decision by the Ontario Superior Court of Justice, a North-Bay Funeral Home was ordered to pay almost $1.3 million to a constructively dismissed employee on a fixed-term contract.

Facts

Mr. McGuinty used to be an owner of McGuinty Funeral Home. In 2012, he sold his shares in the business and agreed to stay on as an employee. As part of that arrangement, Mr. McGuinty was recognized as a key employee and entered into a fixed-term contract with the new owners to continue working until 2022.

The typical employment relationships are for an indefinite period of time. The flip side to this is an employment relationship with a defined end. This is called a fixed-term contract. The basic difference between the two is that unlike the indefinite term contract, when a fixed term contract ends, there is generally no obligation to provide notice of termination. In this case, Mr. McGuinty was employed on a 10- year fixed term contract.

Constructive Dismissal

Unfortunately, shortly after the transfer of ownership, things went sideways as conflict started to build up between the new owners and Mr. McGuinty. Ultimately, Mr. McGuinty went on a stress leave and commenced a legal action for constructive dismissal.

The Superior Court of Justice, concluded that the new owners had constructively dismissed Mr. McGuinty for the following reasons:

• the new owners improperly terminated Mr. McGuinty’s use of the company vehicle;
• the new owners recruited an employee who was subordinate to Mr. McGuinty to track his time at the funeral home;
• the new owners did not pay Mr. McGuinty commissions to which he was rightfully entitled;
• the new owners removed Mr. McGuinty’s photograph from the Funeral Home; and
• without notice to Mr. McGuinty and without seeking any explanation from him, the new owners changed the locks to the funeral home.

In light of all of these changes, the court found that a reasonable person would conclude that the new owners no longer intended to be bound by the terms of fixed-term contract.

Damages

When calculating the damages to award Mr. McGuinty, the court held that because the parties had entered into a fixed-term contract, the new owners were obligated to pay Mr. McGuinty. In other words, Mr. McGuinty was awarded almost $1.3 million, representing salary and benefits he would have received had the contract been honoured.

Key Takeaways for Employers

1. Employers will have to pay to the end of the fixed term of the contract, if it is terminated early. To limit this exposure, fixed term contracts should contain an early termination provision. I suspect that the damages in the case discussed above would have been considerably less had the agreement contained an early termination clause.
2. The McGuinty decision is a stark reminder that fixed-terms contracts should be limited to a relatively short period of time—for example, six months to one year. The longer the term of the contract, the more room it creates for potential exposure.
3. An employee who works even one day past the end of the fixed term becomes an indefinite term employee and is entitled to all the associated rights, including the right to common law reasonable notice of termination. To mitigate this risk, we recommend adding a renewal provision in the fixed term contract which explicitly states that if the employment relationship continues past the date of the fixed term contract, with or without formally being renewed in writing, the employer may subsequently terminate the agreement in accordance with the termination provision.
4. Handled properly, fixed-term arrangements work well. They provide greater flexibility in hiring employees to meet peak work loads, without creating a continuing legal obligation. Mishandled, they can become costly mistakes.

If you require assistance reviewing your fixed-term contracts or to conduct a cost-benefits analysis when deciding to hire an employee on a fixed-term contract, the lawyers at Bernardi would be happy to offer assistance in navigating through this tricky process.

To read this decision in full, see below:
https://www.canlii.org/en/on/onsc/doc/2019/2019onsc4108/2019onsc4108.pdf