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Focus: Rulings show risks of early termination

Focus On: Labour & Employment Law
|Written By Michael McKiernan

Employers should consider steering clear of fixed-term contracts altogether after two recent decisions highlighted the dangers of early termination, according to a Toronto employment lawyer.

In Howard v. Benson Group Inc., released last summer by the Court of Appeal for Ontario, the province’s top court ordered an automotive service centre to pay out the remainder of a former manager’s five-year contract after he was terminated less than two years in.

And in Ballim v. Bausch and Lomb Canada Inc., an Ontario Superior Court judge awarded damages to a former employee fired after just more than three months in a 12-month maternity leave cover position, despite the fact she quickly found a new, better-paying job after her termination.

Employment lawyer Jonathan Borrelli says both cases should make employers wary of offering contracts that specify the length of employment.

“If your agreements aren’t watertight, and something you didn’t anticipate changes in the future, then the primary danger is that you could be on the hook for the entire length of the contract, regardless of when you want to terminate,” says Borrelli, who practises with Toronto-based DMC LLP, a law firm focused on serving dental practices.

He says employers tend to underestimate the value of an open-ended employment contract in cases of temporary employment.

“In my mind, there are very few instances where an indefinite contract is not appropriate. They are fine and suitable for almost any type of employment,” Borrelli says.

The flexibility of an open-ended agreement can be useful, he says, even when employers think they have a strong idea of how long they will need the employee.

For example, in the case of a maternity or paternity leave cover, one of the most common reasons for hiring a temporary worker, the length of leave is rarely certain.

“The duration is not set in stone. Some might need three months, some might take six months and others might end up taking 16 months,” Borrelli says.

By hiring a replacement on an indefinite contract with a sturdy termination clause that accounts for appropriate notice periods and other entitlements mandated by the Employment Standards Act, he says, employers can minimize the overlap when the permanent employee returns, whether they come back earlier or later than originally planned.

“Getting legal advice is key,” Borrelli adds. “Our motto is to hire slow and fire fast. When you’re on-boarding someone, that’s the time to ask questions and get help, so that you can avoid a big payment later.”

Rubin Thomlinson LLP lawyer Titus Totan says many employers don’t realize the consequences of faulty or missing termination clauses until they end up in litigation.

“A lot of the time, you can tell in these decisions that employers are extremely shocked to discover their exposure. It’s incomprehensible to them that they might have to pay a three-month employee nearly a year of severance pay,” says Totan, who works out of the employment law boutique’s Toronto office.

“It’s not just fixed-term but also indefinite-term contracts where termination provisions are a problem if they’re drafted improperly.

“In Ontario, we have some very specific legal requirements on what they need to contain and, without them, they’re effectively just some ink stains on a piece of paper. If you’re going to contract out of the common law, you need to do it properly,” Totan adds.

According to Stan Fainzilberg, an employment lawyer with Toronto firm Samfiru Tumarkin LLP, the appeal court decision in Howard has given employees the upper hand when it comes to disputes over fixed-term terminations in the province by confirming that employees have no duty to mitigate their damages after early termination, unless it is required by the employment contract.

“With mitigation no longer an issue, it does allow plaintiffs to take a harder line in negotiations, simply because the law as we see it right now is more favourable to them,” Fainzilberg says.

Howard involved a sales development manager at a Bowmanville, Ont. automotive service centre hired on a five-year contract starting in September 2012 but then terminated without cause in July 2014. Although the employment agreement contained an early termination clause designed to limit his entitlements to those provided for by the ESA, a Superior Court judge found the provision void for ambiguity.

The same judge granted the former employee’s motion for summary judgment, but he didn’t order the employer to pay out the rest of his salary to the end of his contract. Instead, he awarded common law damages for wrongful dismissal, which are subject to a duty to mitigate.

Then, in its April 8 judgment, a unanimous three-judge panel of the provincial court of appeal overturned the decision.

“I conclude that the motion judge erred in holding that the appellant is entitled to common law damages and that a duty to mitigate applies in the circumstances of this case,” wrote appeal court Justice Bradley Miller on behalf of the court. “In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation.”

The appeal court decision means the employee will get around $200,000 to compensate for the unpaid salary and benefits from the remaining three years of his contract. 

Fainzilberg relied on the Howard decision as counsel to the plaintiff in Ballim.

His client Samina Ballim took up a position in the sales department at a pharmaceutical company in November 2015, covering another employee’s maternity leave.

Although the contract made no mention of an expiry date, an email to Ballim attaching the contract offer stated that “it is a one year contract.”

Two months into the job, Ballim took an approved month-long unpaid leave of absence to visit South Africa for family reasons.

However, after she returned four days later than agreed, the company terminated her employment without cause in February 2016.

Ballim had a new job by May 2016, earning $72,000, or $14,000 per year more than her previous salary.

The employer argued in court that the agreement was for an indefinite term, and that Ballim should only be entitled to common law damages, which would be subject to the duty to mitigate.

However, in a decision granting summary judgment in favour of Ballim, Ontario Superior Court Justice Sidney Lederman ruled that the email sent to Ballim formed part of the terms of the contract.

Taken together with a stipulation in the attached agreement that Ballim would be paid in 26 bi-weekly installments, he found the contract had a fixed term.  

“In this contract, there is a start date, November 18, 2015. The plaintiff is to be paid every two weeks in 26 installments consistent with the accompanying email that expressly provides for a one year duration,” Miller wrote in his Oct. 13 judgment.

“Although no precise end date is specified, one can readily infer the exact end date as being one year from November 18, 2015.”

“My client is obviously thrilled,” says Fainzilberg.

Although no appeal was lodged, he says the parties are yet to agree on the issues of costs and the precise damages due to Ballim for the 38.5 weeks of pay and benefits she missed out on after her termination.

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