Has your firm been considering a fixed-term employment contract for a new position? It could seem like a good option, especially if you need to hire someone for a special project or during a busy season. Perhaps your organization has already used fixed-term contracts successfully. But there’s a hidden danger in these types of employment contracts—and they could end up costing your business a lot of money.
WHAT IS A FIXED-TERM EMPLOYMENT CONTRACT?
A fixed-term employment contract is precisely what it sounds like: An employment contract that has a defined end date or completion goal. This may be a day on the calendar, or it may be more loosely defined as the completion of a project. Once this specified end-date is reached, the contract terminates. Employees who have a fixed-term of employment are often referred to as being “on contract.”
At first glance, this form of employment seems relatively harmless. A business contracts an employee to work for them for a fixed period of time and, when the contract is completed, the relationship ends. Of course, not everything is as it appears to be—and fixed-term contracts have a much shadier side.
HOWARD V. BENSON GROUP INC. SETS THE STAGE
The ongoing court case of Howard v. Benson Group Inc. demonstrates how a fixed-term contract can have some unsavoury effects for a business. The case revolves around a wrongful dismissal suit, wherein a Mr. Howard was contracted by The Benson Group Inc. to work for them on contract beginning in the fall of 2012. Benson dismissed Howard 23 months after the start date of the contract, without cause. Howard launched a wrongful dismissal suit, and argued that he would be entitled to compensation for the remainder of his contract.
Benson had signed a contract for a term of five years with Mr. Howard. At the time of his dismissal, Howard still had three years and one month remaining on his contract. While Benson argued that they needed to give only two weeks of compensation to comply with the Employment Standards Act, the judge presiding over the case disagreed.
The courts ruled in favour of Mr. Howard, although it was initially implied that he was to be awarded based on “reasonable notice.” The ruling was appealed, and the appeals judge instead awarded Howard based on the unexpired portion of his contract—which entitled him to 37 months’ worth of compensation.
WHAT DOES THIS MEAN FOR BUSINESSES?
The Howard case isn’t the first time that businesses have run up against issues with fixed-term contracts. In the past, employers could include a termination clause, which would have mitigated Howard’s claim to compensation. However, businesses are no longer allowed to include such clauses in fixed-term contracts. That effectively means that you need to be very confident that the person you’re hiring is the absolute best fit for your company. If you move to end the contract early, you could find yourself paying out compensation for the remainder of the contract term. That’s bad news if you end up in a situation where an employee just isn’t working out.
Another issue has been employers’ use of fixed-term contracts to avoid hiring full-time employees. Rather than hiring someone into a permanent position, employers create short-term contracts, then simply renew them again and again. If this happens, a court can deem the contract to be “of indefinite duration”—which means you’re on the hook for paying benefits and compensation that the employee may be entitled to.
IS A FIXED-TERM CONTRACT WORTH IT?
There are, of course, times when a fixed-term contract is the right option. However, if your business is considering hiring on a fixed-term contract because you think it will minimize your liabilities, you need to think again. Legal precedent suggests the liabilities of fixed-term contracts are much higher than you might be led to believe.
Felicia is the manager of human capital solutions at AugmentHR. With over six years of recruitment experience coupled with multi-faceted HR roles, Felicia is an expert in matching people with the right role and environment. She has worked in many different industries, including investment banking, HR consulting firms, medical, and commercial. Understanding people is one of her strengths, and she has recruited at every level, from directors, project managers, and engineers to operators and general labourers. Her ability to network and develop relationships has been a key tool to her success. With approximately two years of experience managing people and creating a positive work environment, Felicia’s diverse skill set makes her a well-rounded individual. Her business education and background help her identify different business needs and human capital solutions.