The Ontario Superior Court of Justice has reminded employers that terminating a fixed term employment contract early can prove to be expensive.

In 2016, the Ontario Court of Appeal held in Howard v. Benson Group Inc., that a discharged employee is entitled to payment for the unexpired portion of a fixed term contract on early termination, where the contract does not contain an enforceable termination provision. In McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home), the Superior Court applied Howard v. Benson Group Inc. and decided that a constructively dismissed employee was entitled to the compensation he would have received during the nine years remaining in the term of his employment agreement.

Key Takeaways

Fixed term employment contracts continue to be an effective way for employers to limit their obligations in a termination context. However, careful drafting is needed to avoid unintended liability. Employers should strongly consider the following best practices:

  • specify the period of notice to which the employee is entitled in case of early termination by the employer for any reason;
  • expressly state that the employee will have a duty to mitigate in the event of early termination; and
  • clearly describe the employee’s entitlement to compensation, benefits and any other privileges – constructive dismissal claims often arise where the parties have differing opinions or interpretations as to the employee’s entitlements.

Given the potential cost of getting it wrong, employers should consider obtaining legal advice when preparing fixed term employment contracts for new hires. Employers should also review, and consider revising, their existing fixed term employment contracts – remembering that new consideration needs to be provided in exchange for agreeing to different terms. We also recommend that legal counsel assist with this process.

Background

Concurrent with the sale of his family’s funeral home business, the Plaintiff became employed as the general manager of the funeral home under a 10-year employment agreement. The agreement contemplated that the Plaintiff would provide transitional services to the new owners of the funeral home. In addition to base salary, the agreement provided for commissions, certain benefits, including the use of a vehicle and fuel, and it provided an outline of working hours. The agreement did not contain a termination clause or mandate mitigation.

Within the first year of the contractual term, the relationship between the parties broke down. The plaintiff brought a claim alleging constructive dismissal, among other allegations. He sought damages reflecting his entitlement to compensation and benefits during the unexpired portion of the employment agreement.

Ontario Superior Court of Justice’s Decision

Over the course of a 7-day trial, the Plaintiff argued that several of the employer’s actions indicated that he was constructively dismissed, including:

  • the employer required the return of the vehicle and refused to pay for fuel;
  • the employer tasked a subordinate with tracking the Plaintiff’s time and activities;
  • the employer failed to pay certain commissions to the Plaintiff; and
  • the employer moved the Plaintiff’s workstation, removed his photograph from a wall of photographs showing the ownership history of the business, and changed the locks to the premises without the Plaintiff’s knowledge or consent.

The employer denied most of the Plaintiff’s allegations and also argued that the Plaintiff had acquiesced to some of the alleged conduct.

The Court considered whether each alleged action occurred and, if so, whether the action objectively and subjectively suggested that the employer no longer intended to be bound by the terms of the employment agreement. The Court ultimately concluded that the employer’s actions amounted to a course of conduct that would lead a reasonable person in the Plaintiff’s position to conclude that the employer no longer intended to be bound by the terms of the employment agreement.

Further, the Court applied Howard v. Benson Group Inc. and determined that the Plaintiff was entitled to damages representing the compensation and benefits he would have received if the employment agreement had been honoured. The Plaintiff was awarded over $1.2 million in damages. The Court did not award aggravated or punitive damages as had been sought by the Plaintiff.